Lerner Index Calculator

Lerner Index Formula

The formula used to calculate the Lerner index is:

\[ \text{Lerner Index} = \frac{P - MC}{P} \]

Where:

$ P $ is the price of the product
$ MC $ is the marginal cost of producing one additional unit

Description

The Lerner index measures a firm's market power by assessing its ability to set prices above marginal cost. A higher Lerner index indicates greater market power, while a lower index suggests a competitive market.

Example Calculation

Let's consider the following data for a company:

Price: $500
Marginal Cost: $350

Using the formula:

\[ \text{Lerner Index} = \frac{500 - 350}{500} = 0.3 \]

Thus, the Lerner index for this company is 0.3, indicating some degree of market power.