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The Lerner index and revenue maximization

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  • Laura Spierdijk
  • Michalis Zaouras

Abstract

Based on profit-maximizing behaviour, the usual interpretation of the Lerner index is that a zero value reflects competitive behaviour, while a positive value is associated with market power. We investigate to what extent the usual interpretation of the Lerner index remains valid in a setting where firms do not pursue profit maximization, but instead maximize revenues subject to a minimum-profit constraint. We show that a positive Lerner index still indicates market power, but that the magnitude of a positive Lerner index can no longer be used to determine how much market power there is. Furthermore, extra information would be required to draw conclusions about the presence or absence of market power when the Lerner index is zero or negative. We discuss the empirical implications of our results.

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  • Laura Spierdijk & Michalis Zaouras, 2017. "The Lerner index and revenue maximization," Applied Economics Letters, Taylor & Francis Journals, vol. 24(15), pages 1075-1079, September.
    • Handle: RePEc:taf:apeclt:v:24:y:2017:i:15:p:1075-1079
    DOI: 10.1080/13504851.2016.1254333
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    Cited by:

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    2. Gerasimos T. Soldatos, 2021. "Industry and financial market concentration," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 48(2), pages 275-289, June.
    3. Shaffer, Sherrill & Spierdijk, Laura, 2020. "Measuring multi-product banks’ market power using the Lerner index," Journal of Banking & Finance, Elsevier, vol. 117(C).
    4. Baldwin, Kenneth & Alhalboni, Maryam, 2023. "A value-based measure of market power for the participatory deposits of Islamic banks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 87(C).
    5. Ornelas, José Renato Haas & da Silva, Marcos Soares & Van Doornik, Bernardus Ferdinandus Nazar, 2022. "Informational switching costs, bank competition, and the cost of finance," Journal of Banking & Finance, Elsevier, vol. 138(C).
    6. Molla Ramizur Rahman & Arun Kumar Misra, 2021. "Bank Competition Using Networks: A Study on an Emerging Economy," JRFM, MDPI, vol. 14(9), pages 1-18, August.
    7. Silveira, Douglas & Vasconcelos, Silvinha, 2020. "Essays on duopoly competition with asymmetric firms: Is profit maximization always an evolutionary stable strategy?," International Journal of Production Economics, Elsevier, vol. 225(C).
    8. Fukuyama, Hirofumi & Tsionas, Mike & Tan, Yong, 2024. "The impacts of innovation and trade openness on bank market power: The proposal of a minimum distance cost function approach and a causal structure analysis," European Journal of Operational Research, Elsevier, vol. 312(3), pages 1178-1194.

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