Lerner Index Calculator

The Lerner Index is a measure of market power, indicating the degree of pricing power a firm has by calculating the markup over marginal cost. The closer the Lerner Index is to 1, the greater the market power; a value close to 0 indicates a competitive market.

Calculation Formula

The Lerner Index (L) is calculated as:

\[ L = \frac{P - MC}{P} \]

Where:

• P is the price.
• MC is the marginal cost.

Example Calculation

If the price (P) is $50 and the marginal cost (MC) is $30:

\[ L = \frac{50 - 30}{50} = 0.4 \]

This indicates that the firm has significant market power.

Importance and Usage Scenarios

The Lerner Index is widely used in industrial organization and competition policy to assess the degree of monopoly power and the extent of competition in a market.

Common FAQs

1. What does a higher Lerner Index mean?

   • A higher Lerner Index indicates greater pricing power and less competitive pressure.

2. What is considered a perfectly competitive market in terms of the Lerner Index?

   • In a perfectly competitive market, the Lerner Index is close to 0, as price equals marginal cost.

This calculator is a practical tool for understanding market dynamics and the degree of competition a firm faces.