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

2. 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

3. 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?

4. 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

5. 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

6. Markup Pricing: Supermarkets to Designer Jeans

7. Markup Pricing: Supermarkets to Designer Jeans
Convenience Stores