Any illustrations using actual data? Please focus on the variables required. methodology and the software package to be used for the estimation. Also throw light on the calculation of marginal cost by using Translog cost funtcion.
A practical way to measure the Lerner Index, which is a measure of market power, is to do a regression in log-log form. You will have to set up the causal relation of the bank data you are interested in. You can use any software including Excel, Eviews etc. The coefficient will measure elasticity. The inverse of the elasticity coefficient will be a measure of market power. Look up an old text in Industrial Organization for further reference.
A practical way to measure the Lerner Index, which is a measure of market power, is to do a regression in log-log form. You will have to set up the causal relation of the bank data you are interested in. You can use any software including Excel, Eviews etc. The coefficient will measure elasticity. The inverse of the elasticity coefficient will be a measure of market power. Look up an old text in Industrial Organization for further reference.
Sir, could you provide me with some illustration for the calculation of Lerner Index (if possible)? It would be of great help for me.
Dear Ankit,
The Lerner Index is defined as (P-MC)/P. Most people do not have MC data. So, they back into the estimate by estimating the elasticity. I attach a page with this formula. The source also provides four proxy measures, using excess returns, profit, pric-cost margin, and Tobin's q on p. 168-175,
@Lall B. Ramrattan Oduor et. al (2017) proposed a simple approach to calculating MC for LI. It basically operationalizes the concept for marginal cost by dividing the change in total cost (interest expense and non-interest expense) over output (loans). I am using this approach for estimating LI for each bank in each quarter using their balance sheet data for banks in Pakistan. Personally. I find this approach simple compared to conventional methods of estimating MC using translog function which can be complicated and suffer from identification bias. Will appreciate your thoughts on this.
- Badges
- Science topic
- Similar topics
- Econ
- Business Economics