Welcome back to week eight of the power of markets. We're looking at cases where firms have monopoly power. And what we'll do in this session, is look at how we measure the extent of monopoly power, as well as the sources that give rise to monopoly power. There's one well known index of monopoly power, and that's known as the Lerner Index, named after an economist Abba Lerner. And it looks at the price marginal cost markup. This Lerner Index can range, and let's abbreviate it by L, from zero to one. Zero no monopoly power, no pricing power. In this is the same as perfect competition. because if there's no price marginal cost markup, this learner index is equal to zero. At the other extreme, the amount by which price is marked up over marginal cost, relative to price, approach is one. Now, let's look at a particular case and now let's move away from pure monopoly. But where there are a number of firms in a market. But a small enough number so that any one firm still has some ability to choose some range of choice over price. Let's look at the Aspirin market, as in figure 11.7. Let's assume there are five suppliers, one of which is Bayer Asprin. And let's assume in the overall market, panel B, that there's a overall market demand curve D. And a supply curve by other firms besides Bayer. So the supply of other curve reflects suppliers above and beyond Bayer. And let's finally assume that they behave as perfect compeitors. So that their actions can be depicted by this upward sloping supply curve. Now what we can do is figure out what Bayer's demand curve is in panel A, on the left hand side. And what we can do is look at the difference, at any price, between market demand. And what other firms beside Bayer will supply. At a price of $10, other firms are willing to supply the entire market demand of 14 million bottles. So the demand curve for Bayer, at a price of $10, is zero. Now what happens if the price gets lower to $9 a bottle. In this particular case, the difference between what other firms are willing to supply 12 million, and overall market demand is 3 million. And that gives us a second point on Bayer's demand curve. At a price $9 the magnitude of Bayer's demand small d is 3 million, and Bayer has an associate marginal revenue curve associated with that demand curve MR. Bayer in the setting will figure out, we go to produce each unit, so longest marginal revenue exceeds marginal cost. So in this particular setting, we'll produce 3 million, charge $9. The other competitors will supply the remainder of the market demand of 15 million. they'll supply 12 million, and Bayer accounts for the difference. Now, in this particular setting, the elasticity of demand for Bayer is equal to nine. And you can do the math looking at $9 and looking at incremental changes for a linear demand curve. What you'll figure out is the elasticity of demand is equal to nine. What's the price marginal cost markup? What's the Lerner index? If we and remember the last time in the last session, we also set a profit maximizing output. The price marginal cost markup is one over the elasticity demand. So where the Olstice and Manfer Bayer is nine, its price marginal cost markup. Its learner index is going to equal 0.11. All right. So it gives us one way to measure the magnitude for this particular setting of Bayer's ability to mark up price over, its monopoly power. Now notice how the elasticity demand for Bayer depends on two important things. It depends on the overall market demand elasticity. If, instead of D, the market demand was more elastic. Then Bayer's demand curve would be even flatter, would be even more elastic, and let's say market supply was even more elastic. So, instead of being the SO curve, say it was SO prime. At a price of nine, the rest of the market was only willing to supply 1 million bottles. If the demand hadn't been changed, the magnitude of Bayer's demand curve would be 14 million bottles at a price of nine. So those two important factors determine elasticity demand for a firm like Bayer, where the rest of the market behaves as competitors and Bayer gets to deal with whatever isn't served by the rest of the market.