Market Power Economic Efficiency And The Lerner Index

The book uses distance functions, a generalization of the more familiar production function, as the theoretical and empirical tools to construct Lerner indexes of market power in both the input and output markets. The use of distance functions enables us to explicitly account for the effects of firm inefficiency and price markups in the evaluation of market power. The book focusses on the theory and provides a menu of applications to construct measures of firm efficiency and market power in the financial and public sectors.

A situation in economics that is little short of scandalous is the almost total neglect by mainstream economics of the importance of power in economic affairs. Power in this context means the ability to bend market forces in one's favor, influencing and shaping key economic variables such as prices, wages, and other income determinants. As John Kenneth Galbraith as tutely observes: a dominant fact in economic life is the desire of people everywhere and in all circumstances to get control over their personal lives and their incomes-to escape from the "tyranny of the market. " Power is the means to this end. Ever since Adam Smith, economists have been fascinated by and lavish in their praise for the workings of the market. All modern textbooks are built around Smithian ideas about markets and the way the "invisible hand" works through competition for society's better ment. Yet one can search nearly in vain through leading texts, under graduate and graduate alike, for any reference to market or economic power. This is the situation in spite of the fact that the drive for power, the urge to get control over one's income, permeates the economy as much as does competition. This is a scandal! For a discipline that claims for itself the mantle of a science-one which wants to be accorded the same respect given the natural sciences-it is almost incomprehensible that it should ignore a major force at work in the real economic world.

Pepall's Industrial Organization: Contemporary Theory and Empirical Applications, 5th Edition offers an accessible text in which topics are organized in a manner that motivates and facilitates progression from one chapter to the next. It serves as a complete, but concise, introduction to modern industrial economics. The text uniquely uses the tools of game theory, information economics, contracting issues, and practical examples to examine multiple facets of industrial organization. The fifth edition is more broadly accessible, balancing the tension between making modern industrial analysis accessible while also presenting the formal abstract modeling that gives the analysis its power. The more overtly mathematical content is presented in the Contemporary Industrial Organization text (aimed at the top tier universities) while this Fifth Edition will less mathematical (aimed at a wider range of four-year colleges and state universities.

This book extends the efficiency literature to the case of intertemporal models. First, the authors introduce static network models which serve as building blocks for the intertemporal budgeting models and the dynamic models. Next, the authors devote two chapters to productivity measurements, which are considered as comparative static models. Intertemporal budgeting models and dynamic models are taken up subsequently. Each chapter, except the first, contains empirical applications.

With the rise of digital platforms and the natural tendency of markets involving platforms to become concentrated, competition authorities and courts are more frequently in a position to investigate and decide merger and abuse cases that involve platforms. This report provides guidance on how to define markets and on how to assess market power when dealing with two-sided platforms. DEFINITION Competition authorities and courts are well advised to uniformly use a multi-markets approach when defining markets in the context of two-sided platforms. The multi-markets approach is the more flexible instrument compared to the competing single-market approach that defines a single market for both sides of a platform, as the former naturally accounts for different substitution possibilities by the user groups on the two sides of the platform. While one might think of conditions under which a single-market approach could be feasible, the necessary conditions are so severe that it would only be applicable under rare circumstances. To fully appreciate business activities in platform markets from a competition law point of view, and to do justice to competition law’s purpose, which is to protect consumer welfare, the legal concept of a “market” should not be interpreted as requiring a price to be paid by one party to the other. It is not sufficient to consider the activities on the “unpaid side” of the platform only indirectly by way of including them in the competition law analysis of the “paid side” of the platform. Such an approach would exclude certain activities and ensuing positive or negative effects on consumer welfare altogether from the radar of competition law. Instead, competition practice should recognize straightforwardly that there can be “markets” for products offered free of charge, i.e. without monetary consideration by those who receive the product. ASSESSMENT The application of competition law often requires an assessment of market power. Using market shares as indicators of market power, in addition to all the difficulties in standard markets, raises further issues for two-sided platforms. When calculating revenue shares, the only reasonable option is to use the sum of revenues on all sides of the platform. Then, such shares should not be interpreted as market shares as they are aggregated over two interdependent markets. Large revenue shares appear to be a meaningful indicator of market power if all undertakings under consideration serve the same sides. However, they are often not meaningful if undertakings active in the relevant markets follow different business models. Given potentially strong cross-group external effects, market shares are less apt in the context of two-sided platforms to indicate market power (or the lack of it). Barriers to entry are at the core of persistent market power and, thus, the entrenchment of incumbent platforms. They deserve careful examination by competition authorities. Barriers to entry may arise due to users’ coordination failure in the presence of network effect. On two-sided platforms, users on both sides of the market have to coordinate their expectations. Barriers to entry are more likely to be present if an industry does not attract new users and if it does not undergo major technological change. Switching costs and network effects may go hand in hand: consumer switching costs sometimes depend on the number of platform users and, in this case, barriers to entry from consumer switching costs increase with platform size. Since market power is related to barriers to entry, the absence of entry attempts may be seen as an indication of market power. However, entry threats may arise from firms offering quite different services, as long as they provide a new home for users’ attention and needs.

After strong growth in 2017 and early 2018, global economic activity slowed notably in the second half of last year, reflecting a confluence of factors affecting major economies. China’s growth declined following a combination of needed regulatory tightening to rein in shadow banking and an increase in trade tensions with the United States. The euro area economy lost more momentum than expected as consumer and business confidence weakened and car production in Germany was disrupted by the introduction of new emission standards; investment dropped in Italy as sovereign spreads widened; and external demand, especially from emerging Asia, softened. Elsewhere, natural disasters hurt activity in Japan. Trade tensions increasingly took a toll on business confidence and, so, financial market sentiment worsened, with financial conditions tightening for vulnerable emerging markets in the spring of 2018 and then in advanced economies later in the year, weighing on global demand. Conditions have eased in 2019 as the US Federal Reserve signaled a more accommodative monetary policy stance and markets became more optimistic about a US–China trade deal, but they remain slightly more restrictive than in the fall.