Working Paper: NBER ID: w25251
Authors: Robert E. Hall
Abstract: Market power arises in the case where a seller is aware that raising output will depress price. In the profit-maximizing equilibrium with market power, price exceeds marginal cost. The Lerner index---the ratio of price less marginal cost to the price---is a widely accepted measure of market power. Measuring marginal cost is a challenge. This paper develops and applies a direct empirical approach---marginal cost is measured as the ratio of the observed change in cost to the observed change in output. Because marginal cost is a partial derivative, both changes need to be adjusted for other sources of change. Thus marginal cost is the ratio of (1) the change in cost not associated with changes in input prices to (2) the change in output not associated with productivity change. I develop data for the 60 KLEMS industries for this measure. I find a typical Lerner index of 0.15. Lerner indexes grew moderately between 1988 and 2015.
Keywords: market power; Lerner index; marginal cost; US economy
JEL Codes: D24; L11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| market power (L11) | Lerner index (D63) |
| Lerner index (L00) | markup ratio (E11) |
| market power (L11) | pricing strategy (L11) |
| market power (L11) | marginal cost calculations (D40) |
| military purchases (H56) | marginal cost change (D40) |
| oil prices (L71) | marginal cost change (D40) |