Measurement of Monopoly power
Now let \I~ see how this monopoly power can he measured. l lavc we got any mcavurc hy which we can say that this particular monopolist has so much monopoly power or so much more or less than another monopolist?
There are different ways of measuring monopoly power
Ii) E’fCSS of Price (her i\Iarginal Cost. We have said above that the monopoly power indicates a departure from the competitive behaviour. It is the extent of this departure which ind’cates the extent of monopoly power. Wc have already seen that III a perfectly competitive equilibrium, marginal cost equals price or AR. But this is not so under monopoly. Under conditions of monopoly, AR (Average Revenue) curve slopes downwards to the right, whereas under competition, the two curves AR and MR (Marginal Revenue)
coincide, and boih are horizontal straight line: In a monopoly, MR curve is always below Ihe AR curve. Since the firm is in equilibrium where marginal revenue is equal to marginal cost, thc Me (Marginal Cost) is less than AR (Average Revenue). and AR. i.e.. average
revenue is price. This can be put as undcr :
Elaslidly of ‘Dcmnud and Monopoly Power, We have explained above thaI the difference between margmal nl~1and price measures the degree of monopoly power. 1 he larger is the difference the greater is the firm’s monopoly power, and l’ice versa. This difference ultimately depends upon the elasticity of demand for the firm’s product. Differing elasticities of demand measure the degree of monopoly power. The less is the elasticity of demand the greater is the power or degree of monopoly. (ii) Amount of Supernormal Profits. There is another way to measure monopoly power, viz., by the amount of supernormal profits. Under perfect or free competition. firms can earn only normal profits in the long-run. If there are supernormal profits they arc competed away. This is due to the fact that the new firms will enter the industry and the existing firms will also expand. The result will be that price will come down and costs will go up so that extra profits disappear. But this cannot happen under a monopoly. Since competition is absent. supernormal profits will persist in a monopoly: they are not competed away. Hence, the size of the supernormal profits will measure the degree of monopoly power. The stronger the monopolist’s positiun the larger will be the size of the supcmorrual profits.