Lerner Index Calculator
Measure market power and competition levels with the Lerner Index
Market Power Analysis
Calculation Method
Price & Cost Information
Market price per unit
Cost of producing one additional unit
Formula Used:
Lerner Index = (Price - Marginal Cost) / Price
Lerner Index = ($500.00 - $350.00) / $500.00 = 0.300
Market Power Analysis Results
Market Structure: Oligopolistic
Moderate to high market power
Economic Implications
• Moderate market power
• Some pricing flexibility
• Potential for economic profit
• May warrant monitoring
Competitive Analysis
Industry Benchmarks
Your Lerner Index: 0.300
Example: Alpha Machineries
Company Information
Company: Alpha Machineries
Product: Industrial equipment
Market Price: $500 per unit
Marginal Cost: $350 per unit
Lerner Index Calculation
Formula: Lerner Index = (Price - Marginal Cost) / Price
Calculation: ($500 - $350) / $500 = 0.30
Result: Lerner Index = 0.30 (30% profit margin)
Interpretation: Oligopolistic market with moderate market power
Markup: 42.9% above marginal cost
Interpretation Guide
- • Price = Marginal Cost
- • No market power
- • Maximum efficiency
- • Low market power
- • Many competitors
- • Limited pricing flexibility
- • Moderate market power
- • Few large competitors
- • Strategic pricing
- • High market power
- • Limited competition
- • Price setting ability
Calculation Methods
L = (P - MC) / P
Uses price and marginal cost directly
L = -1 / ε
Uses price elasticity of demand (ε)
Applications
Antitrust analysis and regulation
Competition policy assessment
Market structure analysis
Merger evaluation
Strategic pricing decisions
Academic research in economics
Understanding the Lerner Index
What is the Lerner Index?
The Lerner Index, developed by economist Abba Lerner, is a fundamental measure in economics that quantifies a firm's market power. It indicates how much a company can price its products above marginal cost, serving as a key indicator of market competition and monopoly power.
Economic Significance
- •Measures degree of market power
- •Indicates competition intensity
- •Guides regulatory decisions
- •Helps analyze market efficiency
Key Formulas
Basic Formula:
L = (P - MC) / P
Where P = Price, MC = Marginal Cost
Elasticity Formula:
L = -1 / ε
Where ε = Price Elasticity of Demand
Market Structure Analysis
Perfect Competition
Lerner Index = 0
- • Price = Marginal Cost
- • No market power
- • Maximum efficiency
Monopolistic Competition
Lerner Index: 0.1-0.3
- • Product differentiation
- • Limited market power
- • Many competitors
Oligopoly
Lerner Index: 0.3-0.6
- • Few large firms
- • Strategic interdependence
- • Moderate market power
Monopoly
Lerner Index: 0.6-1.0
- • Single seller
- • High barriers to entry
- • Maximum market power