Lerner Index Calculator
Measure market power and analyze pricing strategies
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 firm's price exceeds its marginal cost, relative to the price.
This index is particularly useful in:
- Analyzing market competition levels
- Assessing pricing power
- Evaluating market efficiency
- Identifying potential monopolistic practices
The Lerner Index is calculated using the formula:
L = (P - MC) / P
Where:
- L = Lerner Index
- P = Price
- MC = Marginal Cost
The index ranges from 0 to 1, where:
- 0 indicates perfect competition
- Values closer to 1 indicate greater market power
The Lerner Index can be interpreted as follows:
- 0: Perfect competition - price equals marginal cost
- 0.01-0.19: Low market power - highly competitive market
- 0.20-0.39: Moderate market power - some pricing flexibility
- 0.40+: High market power - significant pricing control
The Lerner Index is valuable for:
- Developing pricing strategies
- Assessing competitive position
- Making market entry decisions
- Evaluating industry attractiveness
- Regulatory compliance monitoring
Why is the Lerner Index important?
The Lerner Index helps businesses and regulators understand market competition levels and identify potential monopolistic practices. It's a key tool for pricing strategy and market analysis.
What are the limitations of the Lerner Index?
The index assumes perfect information about costs and prices, which may not always be available. It also doesn't account for dynamic market factors or non-price competition.
How often should I calculate the Lerner Index?
It's recommended to calculate the index regularly, especially when market conditions change, new competitors enter, or when adjusting pricing strategies.