EU ANTITRUST: HOT TOPICS & NEXT STEPS

Prague, Czechia

EU ANTITRUST: HOT TOPICS & NEXT STEPS 2022

power can be quantified using the so-called Lerner index, which determines the relationship between product price and marginal cost. The Lerner index has been known since 1934 (Lerner, 1934) and is, at least the economic part of the literature, accepted as a theoretically correct expression of market power (Elzinga and Mills, 2011). A. Lerner based the index, which was later named after him, on basic economic models, including not only the net monopoly model, but also other models with a greater than zero concentration of market power in several companies, e.g., the so-called Cournot oligopoly (Saving, 1970; Cowling and Waterson, 1976; Holt, 1982). Below, a monopoly model is used for illustrative purposes, but it shall be accordingly applicable in other specified models, at least in short term (Varian, 2005, pp. 481–498). In these models, price is not only determined by market mechanisms, but can to some extent be determined by firms, which in principle can set prices above marginal costs. Economically rational company decides on a premise that that its marginal revenue from the last piece sold equals the marginal cost. Thus, unlike in perfect competition, the price can be set above the marginal cost level, because the price of a given piece does not equal the marginal revenue. It can be, in simplicity, illustrated in the following table: Table 1: Imperfect competition example

Total income

Marginal income

Total cost

Marginal cost

Total profit

Piece no.

Price

1 2 3 4 5

10

10 16 18 16 10

10

1 3 6

1 2 3 4 5

9

8 6 4 2

6 2

13 12

-2 -6

10 15

6

-5

Source: Own It stems from the table above that it will be most advantageous for a monopolist to sell only two pieces of product. In such a case, its total profit will be the highest, which is a situation where the marginal revenue still exceeds the marginal cost. Even if it sold three pieces, the marginal income would still be positive (which means higher total income), and even four pieces would make a profit. From the point of view of overall welfare, it would then be best if the company sold four pieces, because the fourth buyer will also have access to the product and in such a case the total surplus will be the highest. A similar situation (more precisely theoretically) is illustrated by the following figure:

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