A GENERALIZED INDEX OF MARKET POWER

Abstract

This paper analyses two approaches to measuring market power–the commonly used Lerner index and a range of exploitation measures–. Itis argued that the Lerner index is designed to quantify market power fromthe supply side and the exploitation measures are designed to quantify marketpower from the demand side, and that the two approaches do notalways behavein a symmetric way, since they do not always have the same bounds. To sortout these potentially undesirable properties, this paper proposes a new generalindex to measure market power, which is symmetrical in the sense that it isbounded between zero and one, regardless of whether the market power comesfrom the supply or the demand side. The index proposed allowsfor the presenceof more than one firm and for the existence of conjectural variations.