Market Power and the Lerner Index: A Classroom Experiment

16 Pages Posted: 14 Nov 2009  

Christian Rojas

University of Massachusetts at Amherst - College of Natural Resources & the Environment - Department of Resource Economics

Date Written: November 13, 2009

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.

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

JEL Classification: A22, D21, D43, L40

Suggested Citation

Rojas, Christian, Market Power and the Lerner Index: A Classroom Experiment (November 13, 2009). Available at SSRN: https://ssrn.com/abstract=1505473 or http://dx.doi.org/10.2139/ssrn.1505473

Christian Rojas (Contact Author)

University of Massachusetts at Amherst - College of Natural Resources & the Environment - Department of Resource Economics ( email )

Stockbridge Hall
80 Campus Center Way
Amherst, MA 01003-9246
United States

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