Three factors determine a firm’s elasticity of demand.
1. The elasticity of market demand. Because the firm’s own demand will be at least as elastic as market demand, the elasticity of market demand limits the potential for monopoly power.
2. The number of firms in the market. If there are many firms, it is unlikely that any one firm will be able to affect price significantly.
3. The interaction among firms. Even if only two or three firms are in the market, each firm will be unable to profitably raise price very much if the rivalry among them is aggressive, with each firm trying to capture as much of the market as it can.