Firm’s Monopoly measurement
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Firm’s Monopoly measurement
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- Concentration ratio
- It is calculated by adding up the market shares of the top four or eight firms in the industry.
- Firm’s Monopoly measurement
- The Herfindahl-Hirschman index
Firm’s Monopoly measurementLerner indexAccording to this measure, the higher the monopolist firm charges above the marginal cost, the higher its monopoly power is said to be.Lerner Index (L)=(Price-Marginal Cost)/PriceThe value of L ranges from 0 to 1. Zero implies no monopoly power and one implies maximum power. L depends on factors like elasticity of demand, presence of competitors, extent of regulations, etc.Concentration ratioThe concentration ratio indicates the extent of competition prevalent in an industry. The ratio can range from 0 to 100%. Zero implies the existence of many firms (high competition) and one implies the absence of competitors (no competition or a monopoly).It is calculated by adding up the market shares of the top four or eight firms in the industry.Price discrimination policyPrice discrimination exists if a firm charges different prices from different consumers. High price discrimination implies more control of the monopolist over the prices. Further, the elasticity of demand is also an indicator of monopoly power.Firm’s Monopoly measurementProfit rateThe profit rate measure indicates that the higher the profit a firm makes, the greater its monopoly power. Earning low profits indicates a competitive market, while earning supernormal profits indicates a monopoly.Herfindahl-Hirschman index (HHI)The Herfindahl-Hirschman index indicates the competition or the market concentration of an industry. It is obtained by squaring the size of the different firms inthe industry and summing the resulting numbers. HHI can range from 0 to 1 or from 0 to 10000 points.Lower HHI indicates more competition, while a higher one indicates less or no competition (i.e., monopoly).Download 49.24 Kb. Share with your friends:
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