Downstream Market Power and the Lerner Index

Ioannis Pinopoulos

Discussion Paper Series from Department of Economics, University of Macedonia

Abstract: A well-known result in oligopoly theory regarding one-tier industries is that the equilibrium mark-up and the Lerner index decreases with the number of firms. In other words, market power is diminished when more firms are present in the market. In the present paper, we consider a two-tier industry and focus on the behaviour of the equilibrium mark-up and Lerner index in the downstream market with respect to a change in the number of downstream ?rms. In a very general setting, without specific demand functions for final goods and vertical relations between upstream and downstream firms, we derive conditions under which the equilibrium downstream mark-up and Lerner index may increase with the number of downstream firms. Moreover, we show that, in contrast to the case of one-tier industries, the equilibrium mark-up and Lerner index in the downstream market can move to opposite directions as a result of an increase in the number of downstream firms. We also provide a specific example by considering a successive Cournot oligopoly model where firms freely enter into the upstream market.

Keywords: Vertically related markets; Market power; Lerner index. (search for similar items in EconPapers)
JEL-codes: L22 L4 (search for similar items in EconPapers)
Date: 2014-11, Revised 2014-11
New Economics Papers: this item is included in nep-com and nep-ind
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