The structure-conduct-performance approach has led to attempts to quantitatively estimate the market power concentrated in the hands of a few firms in an industry.
Our analysis of monopoly suggests that market power creates a gap between marginal cost and price. This led economist Abba Lerner to propose the Lerner index of Monopoly Power (LMP), which is:
The LMP is zero for pure competitors because price equals marginal cost. Marginal cost and price in Figure 2 are both $30 at competitive output Qc (point a); LMP = (30
30)/30 = 0. The exercise of market power increases the Lerner index because the equilibrium gap between price and marginal cost rises. Monopoly output and price in Figure 2 are Qm and $50 respectively (point b), so LMP = (50
30)/50 = .40. While a rising LMP may reflect growing market power, the marginal cost data required to calculate this index are not generally available, requiring economists to turn to other measures of monopoly power.