Lerner Index

$
Current market price
$
Cost to produce one additional unit
Finance

Calculate Lerner Index to measure market power. Ranges from 0 (perfect competition) to 1 (monopoly), indicating price premium over marginal cost.

Formula

L = (P − MC) / P, where P = price, MC = marginal cost
  • L = 0: perfect competition; L = 1: pure monopoly; measures deviation of price from marginal cost

Lerner Index

Inputs
  • Market Price (P): 100 $
  • Marginal Cost (MC): 60 $

Price $100, MC $60: L = (100−60)/100 = 0.40 (moderate market power)

Frequently asked questions

What does L = 0 mean?
Perfect competition where price equals marginal cost.
What does L = 1 mean?
Pure monopoly with maximum market power.
What does a value of 0.4 indicate?
Moderate market power; the firm can set price 40% above marginal cost.