IN PURSUIT OF MONOPOLY POWER Measure of monopoly power: The ability of firms to raise prices above competitive levels, i.e. P>MC, leads to the Learner index o of monopoly power, also called the price-cost argin: (P-MC )/P (1) Cowling Waterson (1976) model From the lectures on profit maximising behaviour we had found the relation 1 P1 where n is the absolute value of the price elasticity of demand and s, the market share of firm i (2 The above gives the relationship between price-cost margins and market shares Multiplying both sides by $i = and summing over N firms we get s11-】NC1Q ∑PQ =14i (1+μ)∑(S hereμ is a. market shares weighted average of a,'s,the conjectural varlation terms for each firm in the industry. By assuming that firms have constant marginal cost, equal to the average cost, one may consider the L.H.s. in (3)as the average industry profit margin (profit te
revenue. ratio ). On the R H S. E(S,2. is the Herfindahl index of concentration. Therefore equation (3)may be rewritten a H (4) R The equation above indicates that the Herfindahl index of concentration is an appropriate index of concentration to be included in the explanation of the profit margin. Therefore we can write the following regression equation for an industry j: (I/R) (5 Cowling Waterson assume that B differs among industries but is constant over time within each industry because all price elasticities and H'sare constant over the relevant time of analysis. Thus we have H (T/R) J(t-1) J(t-1) thus eliminating conjectural variation and the elasticity of demand. If H is expected to increase as H increases, as a result of an increasing degree of collusion then the appropriate specification is (m/R) jt t (m/R) j(t-1) Also if it is accepted that m may vary through the business cycle, then this can be allowed for by control variables. In the end C&Wrun two regressions, one for durable goods industries (50 obs. )and one for the non-durable goods (43 obs. )of the form 2
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