The Lerner Index and Firm Profitability: Empirical Evidence from the Sweet Potato Industry in Kenya
Abstract
This study examines how the market power of sweet potato wholesalers in Kenya influences their profitability, using the Lerner Index as the main measure. Drawing on cross-sectional data from 50 wholesalers in Homa Bay County, the research applies both linear and nonlinear regression models to assess how pricing freedom, cost efficiency, firm size, product differentiation, and overall market structure shape gross profit margins. The linear results suggest that wholesalers who can exercise more control over their prices generally earn higher profits. However, the nonlinear model provides a more nuanced insight: profitability rises with market power only up to a certain point, after which it begins to fall. This inverted U-shaped pattern indicates that while moderate market power is beneficial, too much dominance may create inefficiencies that ultimately reduce returns. The study also finds that cost efficiency and larger firm size meaningfully enhance profitability, whereas market concentration and product differentiation do not show direct independent effects. With strong R² values of 0.77 and 0.80 and no signs of autocorrelation, both models are statistically reliable. The study recommends fostering a competitive environment that still allows reasonable pricing flexibility, while emphasizing improvements in cost management, logistics, storage, and transport to boost wholesalers’ financial performance.
References
Aghion, P., Cai, J., Dewatripont, M., Du, L., Harrison, A., & Legros, P. (2015). Industrial policy and competition. American Economic Journal: Macroeconomics, 7(4), 1–32.
Akande, J. O. (2017). Competition in Sub-Saharan African banking markets: An empirical assessment using the Lerner Index. Journal of Banking Regulation, 18(3), 1–15.
Bain, J. S. (1951). Relation of profit rate to industry concentration: American manufacturing, 1936–1940. The Quarterly Journal of Economics, 65(3), 293–324.
Beck, T., De Jonghe, O., & Schepens, G. (2011). Bank competition and stability: Cross-country heterogeneity. Journal of Financial Intermediation, 20(4), 587–615.
Bergquist, L. F., & Dinerstein, M. (2020). Competition and entry in agricultural markets: Experimental evidence from Kenya. American Economic Review, 110(12), 3705–3747.
Carbó‐Valverde, S., Humphrey, D., & López del Paso, R. (2009). Bank deregulation is a major cause of the recent increase in competition. Journal of Financial Services Research, 36(2–3), 189–210.
CIP. (2015). Sweet potato value chain report for Kenya. International Potato Center.
Elzinga, K. G., & Mills, D. E. (2011). The Lerner Index of monopoly power: Origins and uses. American Economic Review, 101(3), 558–564.
Hicks, J. (1935). Annual survey of economic theory: The theory of monopoly. Econometrica, 3(1), 1–20.
International Monetary Fund. (2019). Global Financial Stability Report: Lower for longer.
Kaplow, L. (2021). Market power and income taxation. American Economic Journal: Economic Policy, 13(1), 245–278.
Kariuki, J. (2024). Market power, efficiency, and financial performance in the Kenyan banking sector. African Journal of Economic Review, 12(1), 45–68.
Kiemo, K. (2020). Competition, market structure, and performance of Kenyan commercial banks. Journal of Economics and Financial Analysis, 5(2), 1–15.
Koetter, M., Kolari, J. W., & Spierdijk, L. (2012). Enjoying the quiet life under deregulation? Evidence from adjusted Lerner indices for U.S. banks. Review of Economics and Statistics, 94(2), 462–480.
Lerner, A. P. (1934). The concept of monopoly and the measurement of monopoly power. The Review of Economic Studies, 1(3), 157–175.
Mason, E. S. (1939). Price and production policies of large-scale enterprise. American Economic Review, 29(1), 61–74.
Maudos, J., & Fernández de Guevara, J. (2004). Factors explaining the interest margin in the banking sectors of the European Union. Journal of Banking & Finance, 28(9), 2259–2281.
Mugo, R., & Kiemo, K. (2021). Competition, risk-taking, and bank profitability in Kenya. Journal of Finance and Banking Studies, 10(3), 55–72.
Muriithi, J. G. (2021). Market power and performance of Kenyan commercial banks: A panel VAR analysis. Journal of Economics and Financial Management, 6(1), 14–29.
Nabay, O., Davis, W., Sesay, E., & Kamara, A. (2020). Market structure and pricing behavior in root and tuber value chains in West Africa. African Journal of Agricultural and Resource Economics, 15(4), 300–318.
Ndwiga, M. (2020). Bank competition, concentration, and profitability in Kenya. International Journal of Economics and Finance, 12(4), 88–104.
Nzuma, J. (2006). Analyzing market power in the seed maize industry in Kenya using NEIO models. University of Nairobi Press.
O’Connell, M., Smith, S., & Tello-Trillo, C. (2024). Market power and corrective taxation. Journal of Public Economics, 215, 104–132.
Odondo, A. J. (2014). Structure, conduct and performance of sweet potato markets in Kenya. Journal of Economics and Sustainable Development, 5(4), 45–58.
Odondo, A. J. (2025). Market structure and profitability of sweet potato traders in Kenya. African Journal of Agricultural Economics, 8(1), 50–72.
Odondo, A. J., Momanyi, G., & Mukras, M. S. (2014). Price formation and margins in the sweet potato value chain in Kenya. Journal of Development and Agricultural Economics, 6(11), 478–486.
Odondo, A. J., Mukras, M. S., & Momanyi, G. (2013). Market concentration and pricing behaviour among sweet potato traders in Kenya. International Journal of Business and Social Science, 4(7), 228–239.
ROSPOGO. (2012). Rachuonyo Sweet Potato Growers Organization Annual Report. Homa Bay County Government.
Shair, F., Shaikh, M., & Shah, S. Z. A. (2019). Market power and profitability: Evidence from Asian banking. Journal of Asian Economics, 64, 1–12.
Tirole, J. (1988). The theory of industrial organization. MIT Press.
Wahinya, M. (2023). Competition, digital transformation, and profitability of commercial banks in Kenya. African Journal of Finance and Management, 11(2), 76–93.
Yuanita, R. (2019). Competition, market power, and bank performance: Evidence from ASEAN. International Journal of Economics and Financial Issues, 9(1), 1–10.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2025 Alphonce Odondo
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
The author fully assumes the content originality and the holograph signature makes him responsible in case of trial.
