Lerner index_China Economic Network - National Economic Portal

lerner index

10:18, July 21, 2011 Source: China Economic Network

Abe Lerner provides us with a method to calculate the market structure based on monopoly power, which avoids the problem that monopoly power must be calculated from sales data.

Economists use Lerner index to measure the degree of market monopoly. Lerner index measures the deviation of price from marginal cost. The calculation formula is: L=(P - MC)/P. Where:

L -- Lerner index,

P -- price,

MC - marginal cost.

Lerner index reflects the strength of monopoly power in the market by measuring the deviation between price and marginal cost. The Lerner index changes from 0 to 1. The larger the Lerner index, the stronger the monopoly power in the market; On the contrary, the higher the degree of competition. When the market is completely competitive, the Lerner index is equal to 0.

For example, if MC=$5 and monopoly price=$10, the Lerner index is equal to $10 - $5/$10=0.5 or 50%.

Lerner's monopoly power index requires people to be able to measure marginal costs. It's not easy, to say the least. Moreover, the price must be linked to a unit with a fixed quality, because the difference in quality means that the actual price has changed. So when a researcher wants to compare manufacturers in an industry by calculating Lerner's monopoly power index, he or she must be sure that all quality factors in the product can be quantified.

The characteristics of Lerner index mainly include the following three points:

① It is difficult to measure the marginal cost. At the same time, price is often related to product quality. Therefore, when comparing monopoly power among manufacturers in an industry through Lerner index, product quality must be taken into account, that is, there must be comparability in price.

② Lerner index is a measure of the actual behavior of manufacturers. It does not measure the potential monopoly power of manufacturers. For example, if a manufacturer already has a strong potential monopoly power in terms of its size or market share, but for some reason, the difference between its product price and marginal cost is not large, then the Lerner index cannot measure the potential monopoly power of the manufacturer.

③ The Lerner index is based on the static comparison between price and marginal cost. It does not investigate the specific reasons for the difference between price and marginal cost, but attributes the difference to monopoly behavior. In many cases, there are many complicated reasons for the difference between price and marginal cost, not just monopoly.

The drawback of the Lerner index is that it is difficult to obtain data on marginal costs.

It reflects the actual behavior of enterprises and does not reflect the potential monopoly or competitive behavior of enterprises. For example, lowering prices may be a strategic action to drive out competitors, but it does not mean that the market is competitive. It is precisely because Lerner index itself reflects the deviation degree between price and marginal cost when the market has dominant power, so it cannot reflect the restrictive pricing and predatory pricing adopted by enterprises to seek or consolidate monopoly status.

The quality of all products in the compared market must have a fixed and unified standard and can be quantified, otherwise, the quality difference of products will lead to the price change of products, thus affecting the accuracy of the conclusions.

(Editor in charge: s)