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Market Power and the Lerner Index: A Classroom Experiment

  • Rojas Christian

    (University of Massachusetts - Amherst)

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    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.

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    Article provided by De Gruyter in its journal Journal of Industrial Organization Education.

    Volume (Year): 5 (2011)
    Issue (Month): 1 (March)
    Pages: 1-19

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    Handle: RePEc:bpj:jioedu:v:5:y:2011:i:1:n:2
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