Lerner Index Calculator

Measure market power and monopoly pricing with the Lerner Index

✓ Market Power Analysis ✓ Price-Cost Margins ✓ Competition Assessment

Lerner Index Calculator

Method 1: Price and Marginal Cost

Market price per unit
Cost of producing one additional unit

Method 2: Price Elasticity of Demand

Usually negative (e.g., -2.5)
Formula: L = -1/Ed
Where Ed is price elasticity of demand

Additional Analysis (Optional)

Company's market share
Number of major competitors
Market structure type

Lerner Index Basics

The Lerner Index measures a firm's market power by comparing price to marginal cost.

Formula:

L = (P - MC) / P
Where:
• P = Price
• MC = Marginal Cost
• L = Lerner Index (0 to 1)

Quick Examples

Perfect Competition
P=$50, MC=$50
Lerner Index = 0
Monopolistic Competition
P=$100, MC=$60
Lerner Index = 0.4
Monopoly
P=$200, MC=$50
Lerner Index = 0.75

Interpretation

0.0: Perfect Competition No Market Power
0.1-0.3: Low Market Power Competitive
0.3-0.6: Moderate Power Oligopoly
0.6-1.0: High Power Monopoly

Market Structures

Perfect Competition
L = 0, P = MC
Monopolistic Competition
L = 0.1-0.4
Oligopoly
L = 0.3-0.7
Monopoly
L = 0.5-1.0

Applications

Antitrust: Assess market dominance
Regulation: Price control decisions
Strategy: Competitive positioning
Investment: Industry attractiveness
Policy: Market intervention needs
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Understanding the Lerner Index

The Lerner Index, developed by economist Abba Lerner in 1934, is a measure of a firm's market power. It quantifies the degree to which a company can set prices above marginal cost.

Key Concepts:

  • Market Power: Ability to influence market prices
  • Price-Cost Margin: Difference between price and marginal cost
  • Elasticity Relationship: L = -1/Ed (price elasticity of demand)
  • Competition Level: Higher index indicates less competition

Economic Implications

For Businesses

Higher Lerner Index indicates pricing power and potential for higher profits, but may attract regulatory attention.

For Consumers

Lower index suggests more competitive pricing and better value for consumers.

For Regulators

High index values may indicate need for antitrust intervention or market regulation.

For Investors

Companies with sustainable high Lerner Index may offer better investment returns.