The Lerner index. The causes and consequences of monopolization of the market

Despite the economic and legislative measures taken by the authorities of different countries to combat monopolism, this phenomenon remains quite widespread. The monopoly power of individual companies carries a serious threat to the development of the economy.

Monopoly and its sources

Monopoly is understood as the dominance in the market of one producer (implementor) or a combined group of such entities (cartels).

The main sources of monopolism:

1. Elastic demand. This factor, in turn, is determined by the availability of similar goods on the market, the speed of buyers' reaction to price changes, the importance of the goods for buyers, the saturation of the market, the variety of functional capabilities of the product and its conformity to the level of income of buyers.
2. Concentration of the market. Where 2-3 companies cover 80-90% of consumers, monopolism manifests itself more quickly than in competitive markets.
3. Cooperation between companies. Acting cohesively, sellers or manufacturers have more power.

Consequences of monopolism

A company that has monopoly power deliberately limits the volume of output of goods and sets inflated prices. She has no incentive to lower production costs. In addition, the company incurs additional costs in order to maintain and strengthen its position.

Monopoly in the market leads to such consequences:

• Resources are spent irrationally;
• Society receives less than necessary goods;
• There are no incentives for developing and implementing new technologies;
• The costs of production are growing.

As a result, production does not reach the maximum possible efficiency.

The monopoly price

One of the results of the manifestation of monopolism is the one-man regulation of prices by the monopolist.

A monopoly is understood as a price that differs significantly from its normal level, which could take place in a competitive environment. Under normal conditions, the price is formed as a result of this or that ratio of consumer demand and market supply. In conditions of monopolism, price is established by the dominant entity at the level that will provide it with superprofits and cover excess expenditures.

The monopoly price may be too high or too low. The inflated price is a consequence of the dominance of a large seller. If the market is dominated by a large buyer in the presence of a large number of sellers, it will tend to understate prices as much as possible.

The Lerner index as an indicator of monopolization

The level of monopoly power and market concentration is measured using the thumb rule, the Lerner index and the Garfindel-Hirschman index.

The Lerner coefficient was proposed in 1934. It is one of the very first methods of determining the level of monopolization and calculation of losses that society bears because of monopolists. Being simple and clear, this indicator clearly characterizes the consequences of monopolization. Today, it is used by economists around the world in assessing the welfare of society.

If the goods are produced and sold in conditions of monopolization, then its price will always be higher than marginal costs. The Lerner index is the result of dividing the price minus the marginal cost of the price. The more the price deviates from the costs, the higher the value the index takes.

Calculation and interpretation of the Lerner index

The Lerner index is calculated by the formula:

• I _L = (P-MC) / P = - 1 / e _d .

P is the monopoly price, and MC is the size of marginal costs.

Ideal competition means that one firm can not influence the price level. The price is at the same level as the marginal cost (P = MS), respectively:

• P-MC = 0;
• I _L = (P-MC) / P = 0 / P = 0.

Any increase in prices for marginal costs indicates that the firm has a certain power. The maximum possible value of the index is 1 and is a sign of an absolute monopoly.

The Lerner index can be expressed in another way - by means of the elasticity coefficient :

• (P-MC) / P = -1 / e _d ;
• I _L = -1 / e _d .

The indicator e _d characterizes the elasticity of demand for the company's goods at the price level. For example, if E = -5, then I _L = 0.2.

A high level of monopolization does not always mean that the company receives super profits. It can spend so much money on maintaining its authority that all profits received as a result of the price increase are leveled.

Manifestations of monopoly in the Russian Federation

During the transition period of the 90's. The Russian economy was characterized by a high concentration in the production sector. The market was dominated by super-large organizations, the choice of business partners was severely limited. The success of the business was heavily dependent on energy supplies. Performance indicators of enterprises fell, production volumes decreased, the technological process was in a state of stagnation.

In 1992, after liberalization, the main players in the market were regional and sectoral monopolies. Issues related to financing, large firms solved at the expense of small partners, because of which the macro level was the problem of disproportion.

Monopolists without regard to consumers overstated prices and received excess income. The state did not have sufficiently powerful levers of influence on the price level. Legislation was unclear, and state institutions were too weak. Taking advantage of the situation, monopolists from various industries secretly unite in cartels. There were cartels among sellers and buyers, as well as mixed ones.

With the onset of the new century, the situation changed little. Almost all of the monopolies, formed in the 90's, continue to operate. Formally, decentralization was carried out in some sectors, but the rise in prices for gas and electricity indicates that monopolies are still strong. Disproportion, generated by the strong influence of large market players, has become one of the causes of the 2008-2009 crisis .