Monopoly Power Measuring Monopoly Power

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Presentation transcript:

Monopoly Power Measuring Monopoly Power In perfect competition: P = MR = MC Monopoly power: P > MC

Monopoly Power Lerner’s Index of Monopoly Power L = (P - MC)/P The larger the value of L (between 0 and 1) the greater the monopoly power. L is expressed in terms of Ed L = (P - MC)/P = -1/Ed Ed is elasticity of demand for a firm, not the market

Monopoly Power Monopoly power does not guarantee profits. Profit depends on average cost relative to price. Question: Can you identify any difficulties in using the Lerner Index (L) for public policy?

Monopoly Power The Rule of Thumb for Pricing Pricing for any firm with monopoly power If Ed is large, markup is small If Ed is small, markup is large

Elasticity of Demand and Price Markup $/Q $/Q MC Q* P* P*-MC The more elastic is demand, the less the markup. AR MR Quantity Quantity

Markup Pricing: Supermarkets to Designer Jeans

Markup Pricing: Supermarkets to Designer Jeans Convenience Stores

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