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Industry Economics - Essay Example

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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 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 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

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inclined towards 0 indicates high competition in the industry, therefore it can be said that industrial concentration has a direct relation with the Lerner Index. Low industrial concentration and low Lerner Index produce are favorable for the consumers. In 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. Firms enjoy liberty to determine high prices because they are not threatened by the presence of substitute products in the market and the consumers are bound to buy the products offered by the small number of firms. In some cases firms operating in an industry enter into agreements not to drop the prices and in this way, all the firms in the market benefit from the high market prices. Even though regulatory authorities discourage the exercise of such collusion among the firms, sometimes such agreements are entered into informally. Another factor that influences Lerner Index is the price elasticity of demand. Price elasticity of demand is the measure of the extent of change in the quantity of goods demanded due to a change in price. Normally the price elasticity of demand is negative because an increase in price normally causes a decrease in the quantity demanded. The extent of the change depends upon the nature of goods and the availability of substitute goods in the market. If substitute goods are available in the market, the price elasticity of demand will be high. The consumers will move towards the substitute goods in case of an increase in the price. This scenario arises when there is high competition in the industry (Samuelson, 2001). Due to the high number of firms operating in the industry, there are so many substitute products available in the market. In response to any change in the price by any firm, there is a higher change in the quantity demanded. This is one of the factors that keep the firms from increasing the prices

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Industry Economics [University] [Instructor Name] Lerner Index, which is defined by equation; L = (P – MC)/P, where P = Market price set by the firm and MC = Marginal cost of the firm. Lerner Index is used to describe the extent of monopoly prevailing in a market…
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