Which Factors Influence the Lerner Index - Research Paper Example

There are a number of factors that influence the monopoly prevailing in a market. The monopoly in a market is directly influenced by the level of competitiveness in a market which in turn depends upon the number of firms operating within the market. The competitiveness also depends upon the market share held by the firms operating in the market. If a significant proportion of the market share is held by a single firm, it can be said that the firm holds a monopoly over the market. One of the factors which influence the Lerner Index is industrial concentration.

Industrial concentration is a function of the number of firms operating in a market and the respective market shares held by such firms. The industrial concentration is calculated by taking into account the market shares of the firms operating in the market (Perloff, 2008). The market shares of the largest firms in the industry are added together and if the proportion of their cumulative market share is low, it can be said that the industry is competitive, however, if the proportion is high, it can be said that there is the monopoly in the industry.

The Lerner Index is influenced by industrial concentration because, in case of low industrial concentration which means high competitiveness, the firms will have to determine a lower market price. Market price determined by a firm is one of the variables used for the calculation of Lerner Index therefore in case of low market price the Lerner Index will also be low. Since Lerner Index which is inclined towards 0 indicates high competition in the industry, therefore it can be said that industrial concentration has a direct relationship with the Lerner Index.

Low industrial concentration and low Lerner Index produce are favorable for the consumers. In the case of low competition, firms determine high market prices for their products and in this scenario, consumers are exploited while the firms keep their profit margins very high.