Market Power and the Lerner Index: A Classroom Experiment

Abstract:     
We describe a classroom experiment that illustrates the concepts of market power and the Lerner Index. Students are organized in groups, each making a decision for a monopolist. Monopolists face different (unknown) demand curves, each with a different (constant) elasticity. Through repetition, students discover the profit maximizing solution and find that different monopolies have different mark-ups. The experimenter then reveals the unknown demand curves and illustrates how different elasticities are graphically and numerically connected to mark-ups and the Lerner index. The experiment can be used in a wide variety of courses including principles of economics, intermediate microeconomics, industrial organization, international trade, managerial economics and MBA classes. The experimental design is flexible: it can accommodate different class sizes (ranging from 10 to 100 students) as well as different demand parameterizations.

Number of Pages in PDF File: 16

Keywords: Market power, Lerner index, teaching, economic experiments, monopoly, demand elasticity

JEL Classification: A22, D21, D43, L40

working papers series