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Monopoly Measurement
Professor A.P. Lerner has put forwards a measure of monopoly power which has gained greets popularity and is most widely cited. Liner takes perfect competition as the basis of departure of measuring monopoly power. He regards pure or perfect competition as the state of social optimum or maximum welfare and any departure from it would indicate the presence fulsome monopoly power leading to misallocation of resources or state of less than social optimum. As we know in perfect competition price is equal to marginal cost of the product in the equilibrium position and it is this equality of price with marginal cost under perfect competition that ensures maximum social welfare or optimum allocation of resources.
Now when competition is less than pure or perfect the demand curve facing a firm will be sloping downward and marginal revenues curve will lay below It. Consequently when competition is less than pure (perfect) that is when it is imperfect in a seller equilibrium position marginal cost will be equal to marginal revenue but price will stand higher than marginal cost or marginal revenue. This divergence between price and marginal cost, according to Professor Lerner is the indicator of the existence of monopoly power. The greater this divergence between price and marginal cost the greater the degree of monopoly power possessed by the seller. Based on this Lerner has given the following precise index of the degree of monopoly power.
Degree of monopoly power = P – MC/P
Where P denoted price and MC denoted marginal cost at the equilibrium level of output.
When competition is pure or perfect price (p) is equal to marginal cost and therefore learners index of monopoly power is equal to zero indicating no monopoly power at all for when price is equal to marginal cost P – MC will be equal to zero and the above formula will yield the value fo index as zero.
Thus under perfect completion Lerner index of monopoly power (P – MC / P) = 0 / P = 0. On the other hand, when the monopolized product entails no cost of production that is when the product is free goods whose supply is controlled by one person the marginal cost will be equal to zero and Lerner index of monopoly power (P- MC / P ) would be equal to one or unity. Thus when MC is equal to zero P – MC / P = P – O / P = P / P = 1.
It is thus clear that Lerner index of monopoly power can vary from zero to unity. Within this range the greater the value of the index (P – MC/ P) the greater the degree of monopoly power possessed by the seller for instance if the price of a product is equal to $ 15 per unit and its marginal cost is$ 10 then the value of index of monopoly power will be 15 – 10 / 15 = 5 /15 = 1/3 and when the price is equal to $ 20 and marginal cost is equal to 10, the index of monopoly power will be equal to 20 – 10 / 20 = 10 / 20 = ½.
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Now when competition is less than pure or perfect the demand curve facing a firm will be sloping downward and marginal revenues curve will lay below It. Consequently when competition is less than pure (perfect) that is when it is imperfect in a seller equilibrium position marginal cost will be equal to marginal revenue but price will stand higher than marginal cost or marginal revenue. This divergence between price and marginal cost, according to Professor Lerner is the indicator of the existence of monopoly power. The greater this divergence between price and marginal cost the greater the degree of monopoly power possessed by the seller. Based on this Lerner has given the following precise index of the degree of monopoly power.
Degree of monopoly power = P – MC/P
Where P denoted price and MC denoted marginal cost at the equilibrium level of output.
When competition is pure or perfect price (p) is equal to marginal cost and therefore learners index of monopoly power is equal to zero indicating no monopoly power at all for when price is equal to marginal cost P – MC will be equal to zero and the above formula will yield the value fo index as zero.
Thus under perfect completion Lerner index of monopoly power (P – MC / P) = 0 / P = 0. On the other hand, when the monopolized product entails no cost of production that is when the product is free goods whose supply is controlled by one person the marginal cost will be equal to zero and Lerner index of monopoly power (P- MC / P ) would be equal to one or unity. Thus when MC is equal to zero P – MC / P = P – O / P = P / P = 1.
It is thus clear that Lerner index of monopoly power can vary from zero to unity. Within this range the greater the value of the index (P – MC/ P) the greater the degree of monopoly power possessed by the seller for instance if the price of a product is equal to $ 15 per unit and its marginal cost is$ 10 then the value of index of monopoly power will be 15 – 10 / 15 = 5 /15 = 1/3 and when the price is equal to $ 20 and marginal cost is equal to 10, the index of monopoly power will be equal to 20 – 10 / 20 = 10 / 20 = ½.
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