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A generalized index of market power


  • Hernán Vallejo



This paper analyses two approaches to measuring market power-the commonly used Lerner index and a range of exploitation measures-. Itis argued that the Lerner index is designed to quantify market power fromthe supply side and the exploitation measures are designed to quantify marketpower from the demand side, and that the two approaches do not always behavein a symmetric way, since they do not always have the same bounds. To sortout these potentially undesirable properties, this paper proposes a new generalindex to measure market power, which is symmetrical in the sense that it isbounded between zero and one, regardless of whether the market power comesfrom the supply or the demand side. The index proposed allows for the presenceof more than one firm and for the existence of conjectural variations.*******************************************************************************************************************Este documento analiza dos enfoques para medir poder de mercado-el frecuentemente utilizado índice de Lerner y un conjunto de medidas de explotación-. Se argumenta que el índice de Lerner está diseñado para cuantificarel poder de mercado por el lado de la oferta y que las medidas de explotaciónestán diseñadas para cuantificar el poder de mercado por el lado de la demanda,y que esos dos enfoques no siempre tienen los mismos límites. Paracorregir estas propiedades potencialmente no deseables, este documento proponeun nuevo índice general para medir poder de mercado, que es simétrico-estando restringido a valores entre cero y uno-, independientemente de si elpoder de mercado proviene del lado de la oferta o de la demanda. El índice propuestopermite la presencia de más de una firma y la existencia de variacionesconjeturales.

Suggested Citation

  • Hernán Vallejo, 2007. "A generalized index of market power," REVISTA DE ECONOMÍA DEL ROSARIO, UNIVERSIDAD DEL ROSARIO, December.
  • Handle: RePEc:col:000151:004422

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    References listed on IDEAS

    1. Scully, Gerald W, 1974. "Pay and Performance in Major League Baseball," American Economic Review, American Economic Association, vol. 64(6), pages 915-930, December.
    2. William M. Boal, 1995. "Testing for Employer Monopsony in Turn-of-the-Century Coal Mining," RAND Journal of Economics, The RAND Corporation, vol. 26(3), pages 519-536, Autumn.
    3. William M. Boal & Michael R. Ransom, 1997. "Monopsony in the Labor Market," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 86-112, March.
    4. Bresnahan, Timothy F., 1989. "Empirical studies of industries with market power," Handbook of Industrial Organization,in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 17, pages 1011-1057 Elsevier.
    5. A. P. Lerner, 1934. "The Concept of Monopoly and the Measurement of Monopoly Power," Review of Economic Studies, Oxford University Press, vol. 1(3), pages 157-175.
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    More about this item


    market power; mark up; mark down; Lerner index; exploitation measures; industrial organization; conjectural variations;

    JEL classification:

    • D49 - Microeconomics - - Market Structure, Pricing, and Design - - - Other
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms


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