Measures of Monopoly Power

\[\text{Lerner Index}=\frac{P-MC}{P}\]

where P is the price of the product and MCMC is the marginal cost of producing one more unit.

Shows % of total market sales by top firms (e.g., top 4 or 8).

• Firms may act like one big monopolist if shares are high, colluding on prices.
• Limit: High ratio (e.g., 80%) needed but not enough—competition can still happen.

Real-Life: Indian cement industry—top 4 hold ~60%, hinting coordinated pricing.
Key Takeaways:

• Measures size, not behavior.
• High = alert, but check more.
• Quiz: Top 3 at 70% means monopoly? (No, not guaranteed).

Super-normal profits (excess over all costs + normal returns) signal power.

• Perfect competition: Normal profits only.
• Monopoly: High profits deter entrants; stronger hold = bigger profits before rivals jump in.

Real-Life: Jio's early telecom profits—dominated, earned extras before competition grew.
Key Takeaways:

• Profits attract entrants eventually.
• Good indicator but ignores costs/risks.
• Quiz: Monopoly earns what vs competition? (Super-normal vs normal).

• Varies inversely with demand elasticity: Inelastic demand = higher L.
• Defects: Misses non-price rivalry (ads) and output curbs (unused capacity, entry blocks).

Visual Aid (Monopoly Graph Insight):

Real-Life: Pharma drugs—P=₹100, MC=₹20 → L=0.8 (patent power).
Key Takeaways:

• Best numerical measure.
• Use with elasticity: \[L=\frac{1}{|E_d|}\].
• Quiz: P=20, MC=10 → L=? (0.5).