Review of Industrial Organization 13: 687–696, 1998.
© 1998 Kluwer Academic Publishers. Printed in the Netherlands.
Measuring Monopoly Power, Revisited
CLEMENT G. KROUSE
Department of Economics, University of California, Santa Barbara, CA 93106, U.S.A.
Abstract. The accuracy of monopoly power measures derived from case study econometric mod-
els has been questioned recently by Hyde and Perloff (1995) and Boyer (1996). Using the stan-
dard industry-form of that model, Hyde and Perloff show that the parameter estimates associated
with monopoly power are highly sensitive to mis-speciﬁcations of the demand and supply func-
tional forms. Boyer’s criticism is made in principle: he reproves the model for generally failing to.
“. . . capture the diversity and complexity of oligopoly ...”inrespecttoentry,product differentiation,
ﬁxity of capital, capital adjustment costs, dynamic demand linkages, and variations in monopoly
power over time and in the cross-section of ﬁrms. While these several criticisms might appear to point
at inherent weaknesses in the case study econometric approach, it is here argued that the problem lies
in the usual empirical practice.
Key words: Monopoly power, oligopoly pricing.
JEL Classiﬁcations: L1, L4.
Except perhaps for vertical market arrangements, no matter in industrial organi-
zation has received more attention than that given to measuring monopoly power.
Notwithstanding the common purpose, these latter measurements have followed
two, quite different lines. The ﬁrst chronologically, and the centerpiece of industrial
organization economics from 1950–1980, rests on the notion that one can infer the
extent of monopoly power in speciﬁc cases from the analysis of a broad cross-
industry relationship between indices of market structure and proﬁtability.
limitations of this structure-performance methodology became increasingly clear
in the 1970s, alternative case study econometric (CSE) models developed. In these
more focussed studies the basic approach is to recognize that, other things equal,
the equilibrium set of prices and quantities in an oligopoly provides evidence on
Professor of Economics, University of California, Santa Barbara, CA 93106, U.S.A. Thanks to
C. Cabolis, K. Danger, K. Boyer and J. Perloff for comments.
There are several reviews of empirical work along this line, including Gersoki (1988),
Schmalensee (1989) and Utton (1995).