EU ANTITRUST: HOT TOPICS & NEXT STEPS

Prague, Czechia

EU ANTITRUST: HOT TOPICS & NEXT STEPS 2022

the price at a higher level (and according to the table above, marginal costs will usually be lower), the value of the Lerner index will be usually positive. Since its suggestion in 1934, the Lerner index has been the one technically and conceptually correct expression of a degree of a market (monopoly) power in economics. If it is accepted that there is no difference between legal and economic understanding of a market power, as is argued above, the Lerner index shall be in theory the right toll for assessing a market power. There are, however, issues that are considered in competition law and not in the Lerner index. It is only applicable to monopolies and high market power firms downstream, not upstream (monopsonies and alike). The results may be influenced by a lack of dominant’s firm efficiency (increasing its marginal costs). If increased marginal costs due to inefficiency of the firm are not reflected in its decision making, it may lower the Lerner index and making (false) impression of a lower market power. Most importantly, however, the Lerner index requires the identification of marginal costs. The actual marginal cost of the firm is, in fact, rather a mythic figure, which is extremely difficult to measure or even estimate with enough accurateness (Odudu, 2006, p. 109; Breshanan, 1989). It cannot be regularly measured, which, however, does not exclude its occasional use. 3. Market power and product specific price elasticity of demand It is an interesting twist that foundations of Lerner’s work were analyses of a curve of demand for a specific product (an individual demand curve) in a monopoly by E. Chamberlin and J. Robinson (Chamberlin, 1933; Robinson, 1933). As already discussed above, a monopolistic firm aims to produce the quantity at which marginal revenue equals marginal costs (i.e., MR = MC). In addition, monopoly’s marginal revenue is a function of price and price elasticity of demand, expressed as MR = P(1 – 1/ ε ) (where MR are marginal revenues, P is price and ε price elasticity of demand). The same holds for any other firm (Varian, 2005, p. 425). These two equations may be combined and reshuffled in the following one:

An observant reader may identify that the right side of the equation is, in fact, the calculation of the Lerner index. Hence, the Lerner Index is an inverse function of a product specific price elasticity of demand.

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