1. What is the Lerner Index?

The Lerner Index is a measure of a firm's market power that ranges from 0 (perfect competition) to 1 (monopoly). It measures the percentage markup of price over marginal cost.

2. How Does the Calculator Work?

The calculator uses the Lerner Index formula:

Where:

• \( Price \) — The price of the good/service (in currency)
• \( Marginal\ Cost \) — The cost to produce one additional unit (in currency)

Explanation: The index shows what portion of price represents market power rather than production costs. Higher values indicate greater monopoly power.

3. Importance of Lerner Index

Details: The Lerner Index is widely used in industrial organization economics to measure market power, assess competition levels, and evaluate antitrust cases.

4. Using the Calculator

Tips: Enter price and marginal cost in the same currency units. Both values must be positive (price > 0, MC ≥ 0).

5. Frequently Asked Questions (FAQ)

Q1: What does a Lerner Index of 0 mean?
A: An index of 0 indicates perfect competition where price equals marginal cost (no market power).

Q2: What does a Lerner Index of 1 mean?
A: An index of 1 indicates monopoly power where price is set much higher than marginal cost.

Q3: What are typical Lerner Index values?
A: Most competitive markets range 0-0.2, oligopolies 0.2-0.5, and monopolies approach 1.

Q4: What are limitations of the Lerner Index?
A: It requires accurate marginal cost data, which can be difficult to measure. It also assumes profit maximization.

Q5: How does this relate to price elasticity?
A: The Lerner Index equals the inverse of the price elasticity of demand under profit maximization.