Lecture 4 market power econ483 econ of innovation

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Unformatted text preview: nd. dP /P dP %∆P ε measures the responsiveness of demand to a change in price. Lecture 4: Market power, Econ483: Econ of Innovation & Technology, Evangelia Chalioti c A ll rights reserved. Determinants of market power Rearranging terms in the previous equation, Pm MC (Q m ) = P m Pm 1 , ε MC (Q m ) 1 = m P ε The Lerner index (L) shows the ratio of the …rm’ price-cost margin & its price s 1 Pm L= = ε MC (Q m ) Pm ) It is a measure of market power since it is increasing in the di¤erence between price & marginal cost (the price distortion). The more elastic demand (higher ε), the greater the reduction in quantity demanded when price rises the smaller the price distortion Lecture 4: Market power, Econ483: Econ of Innovation & Technology, Evangelia Chalioti c A ll rights reserved. Determinants of market power In an imperfectly competitive market, a …rm faces a more elastic demand & thus, its market power decreases as the number of competitors increases the goods becomes less di¤erentiated The higher the degr...
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