EU ANTITRUST: HOT TOPICS & NEXT STEPS

EU ANTITRUST: HOT TOPICS & NEXT STEPS 2022

Prague, Czechia

Figure 1: Monopoly

Source: Varian, 2005, p. 426 The figure shows, in particular, that a monopoly will sell just the quantity in which the marginal revenue curve (MR) intersects the marginal cost curve (MC), but the monopolist sets the price for this quantity at the point where the vertical line of the quantity sold intersects the demand curve, thus higher than where the equilibrium would be in perfect competition, and with less output (i.e. the intersection of the demand curve and the marginal cost curve). The Lerner index is calculated as follows: where P is price and MC marginal cost. The idea behind the Lerner index can be paraphrased as follows. In perfect competition, where a company has no market power, the price equals its marginal cost. The higher a company can set a price above this point, the more market power it has, as it can better influence the market to its advantage (for the benefit of its profit). To eliminate absolute numbers (so that the index is not higher just because the unit price is higher), A. Lerner suggested dividing the difference by price, so the result can be expressed in percentages. For the purposes of the Lerner index, it is then clear that in the potential equilibrium according to the chart above, its value would be zero, because the price (P) equals the marginal cost (MC). However, since the monopolist will set

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