Question

Business Strategy in Economics:

Market power can be measured in various ways; explain. Looking at both performance and structure, what would you conclude about which of industries A or B has greater market power?

Industry A

11 firms, with market shares 20%, 20%, 20%, 15%, 10%, 5%, 2%, 2%, 2%, 2%, 2%

P= $14, MC = $10, η = 1.5

Industry B

25 firms, with market shares 40%, 5%, 5%, 5%, 5%, 2%, …… 2% (20 firms each with 2%)

P = $12, MC = $10, η = 5

Answer 1

For checking the market power, we can use Lerner Index. ‘The Lerner index measures a firm’s level of market power by relating price to marginal cost’.

Lerner index can be calculated using the formula;

L=(P-MC)/P

Where, L is the Lerner index, P is the price, MC is the marginal cost

Industry A

P= $14, MC= $10

Therefore, L= (14-10)/14

                   = 0.285

Industry B

P= $12, MC= $10

Therefore, L= (12-10)/12

                   = 0.166

Higher Lerner index indicates higher market power. Therefore, industry A has more market power than industry B.

Here we can conclude that Industry A has more market power. (According to the Lerner index)