The Lerner index and revenue maximization

Laura Spierdijk, Michalis Zaouras

Research output: Contribution to journalArticleAcademicpeer-review

8 Citations (Scopus)
2 Downloads (Pure)

Abstract

Based on profit-maximizing behaviour, the usual interpretation of the Lerner index is that a zero value reflects competitive behaviour, while a positive value is associated with market power. We investigate to what extent the usual interpretation of the Lerner index remains valid in a setting where firms do not pursue profit maximization, but instead maximize revenues subject to a minimum-profit constraint. We show that a positive Lerner index still indicates market power, but that the magnitude of a positive Lerner index can no longer be used to determine how much market power there is. Furthermore, extra information would be required to draw conclusions about the presence or absence of market power when the Lerner index is zero or negative. We discuss the empirical implications of our results.
Original languageEnglish
Pages (from-to)1075-1079
JournalApplied Economics Letters
Volume24
Issue number15
DOIs
Publication statusPublished - 2017
Externally publishedYes

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