Monopoly Market Power
• “It is a ability of firm to set the price of a good or
service without risking the loss of its entire market
• Price taker and Price maker
• Examples: Indian Railways
Sources of Market Power
Lack of rival firms
What is Measures of concentration?
“In economics, market concentration is a function of
numbers of firms and their respective shares of the total
production in a market”
Degree of market concentration
It is the measure of shares of different companies in a particular
Primarily two types of Concentration:-
1.Highly Concentrated Electricity(100%) – 1.00
2.Unconcentrated Car Industry, Mobile Industry
Methods to measure concentration
Concentration ratio (CR)
Herfindahl’s index (H-index)
Learner’s index (l-index)
What is Concentration ratio?
It is the ratio of market share of a particular firm/company to that
of the whole industry.
Example-Mobile phone industry
Four-Firm Concentration Ratio
Four-Firm Concentration Ratio
It is the percentage of total industry sales made by top 4 largest firms
of an industry.
Example:-4 companies S1 ,S2 ,S3 and S4
C R m = s1 + s2 + s3 + s4
where si is the market share.
Varies from 0 to 100( depends on low, medium or high concentration).
Example of CR
market shares of telecommunication industry
Airtel = 35%
Reliance = 22%
BSNL = 12%
Tata Indicom = 11%
So CR= (35+22+12+11)%
Herfindahl’s Index (HHI)
Widely used method to measure the degree of concentration It is given by the sum of squared values of market share of the
firms in an industry.
H-index gives more weightage to larger firms of industry. Smaller firms are left out
Varies from 0 to 100 %.
H-index gives more weight to largest firms of industry.
Example:Mobile Operating systems(World market)
Windows Mobile 10%
HHI = (29)2 + (27)2 + (10)2 + (5)2 = 2324
Evaluation of H-index
Single firm with 100% share
1000 equal sized firms (so each have 0.1 % share)
11 industries 1 with 50% share and other 10 are with 5% each
Advantages of H-index
Wide amount of data is taken into account
Helps Government in determining firms who are gaining
Usual Government standards:-
2000 Highly Concentrated
1000 or less Un-concentrated
It is the method to measure the degree of firm’s monopoly
It is also known as price-cost margin or price cost markup.
It is given by the ratio of difference between price(P) and
marginal cost(MC) to price.
L = (P-MC)/P
Varies from 0 to 1.
Derivation of L=(P-MC)/P
• MC = MR
MC = d(TR)/dQ
MC= P + Q(dP/dQ)
MC= P [1+ (Q/P)(dP/dQ)]
MC= P [1-(1/e)]
where “e” is a price elasticity of demand.
where 1/e –profit maximizing mark up over price
Mark up of price over marginal cost divided by price is called Lerner’s index of monopoly
Difficulties arise by using L-index
A firm with a great deal of monopoly power may keep it’s price low to
avoid legal scrutiny (to deter entry into the industry).
Learner index is applicable in static context but it is not very useful in
dynamic context when firm’s demand and cost function shift over time.
Three conclusions of Concentration Ratios
If an industry becomes more concentrated will firms monopolize the price of their products ?
Even after an increase in concentration ,the...