Market Power and the Lerner Index: A Classroom Experiment
We describe a classroom experiment that illustrates the concepts of market power and the Lerner Index. Students are organized in groups, each making a decision for a monopolist. Monopolists face different (unknown) demand curves, each with a different (constant) elasticity. Through repetition, students discover the profit maximizing solution and find that different monopolies have different mark-ups. The experimenter then reveals the unknown demand curves and illustrates how different elasticities are graphically and numerically connected to mark-ups and the Lerner index. The experiment can be used in a wide variety of courses including principles of economics, intermediate microeconomics, industrial organization, international trade, managerial economics and MBA classes. The experimental design is flexible: it can accommodate different class sizes (ranging from 10 to 100+ students) as well as different demand parameterizations. Finally, to reinforce the economic concept of profit maximization (MR=MC) in this setting, we also suggest and describe the implementation of an exercise based on the experimental design.
References listed on IDEAS
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- Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, March.
- Atin Basuchoudhary & Christopher Metcalf & Kai Pommerenke & David Reiley & Christian Rojas & Marzena Rostek & James Stodder, 2008. "Price Discrimination and Resale: A Classroom Experiment," The Journal of Economic Education, Taylor & Francis Journals, vol. 39(3), pages 229-244, July.
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