Abstract
importance in the design and application of antitrust policy. Much of the recent literature has focused on the structural and behavioral determinants of monopoly and monopsony power, including the characteristics of costs and demand and the ways in which firms in the market interact with each other. There has been less concern, however, with the development of a measure of monopoly (or monopsony) power. Instead, the Lerner index, first introduced in 1934, has for years been accepted as the standard measure of monopoly power and is often used as a summary statistic in antitrust applications.1 The Lerner index is just the margin between price and marginal cost, L = (P MC)/P. In a static market, D = I1/, where rfis the elasticity of demand facing the firm, so that the firm's elasticity of demand completely determines its monopoly power.2 However, this need not be the case in a
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