Lerner Index Calculator
From price and marginal cost, compute the Lerner Index of a firm's market/price-setting power.
Input Data
Results
At a glance:The Lerner Index measures market power — the ability to set price above marginal cost and earn excess profit: Lerner = (price − marginal cost) ÷ price. It ranges 0 to 1: 0 = perfect competition (no pricing power); closer to 1 = stronger market power (monopolist highest). A classic industrial-organisation indicator for competition and monopoly, used with HHI.
Formula
Lerner Index = (price − marginal cost) ÷ price.
$$L = \dfrac{P - MC}{P}$$$$P = \text{price}, \; MC = \text{marginal cost}, \; 0 \le L \le 1$$How to Use
- Enter the product price.
- Enter the marginal cost of one more unit.
- View the Lerner Index (0 to 1) reflecting pricing power.
Lerner Index examples ((price − marginal cost) ÷ price)
| Price | Marginal cost | Lerner | Market power |
|---|---|---|---|
| HK$100 | HK$60 | 0.4000 | Moderate (40% markup) |
| HK$50 | HK$45 | 0.1000 | Low (near competitive) |
| HK$200 | HK$40 | 0.8000 | Very strong (near monopoly) |
Lerner = (price − marginal cost) ÷ price. 0 = perfect competition; closer to 1, stronger market power.
Case Studies
Case 1: Lerner Index of pricing power
A product priced at HK$100, marginal cost HK$60.
Lerner = (100 − 60) ÷ 100 = 40 ÷ 100 = 0.40.
0.40 means 40% of the price is markup above marginal cost — considerable pricing power. 0 = perfect competition; closer to 1, stronger market power, monopolist highest.
Case 2: Lerner reflects competition level
Lerner compares competition across firms/industries. Price HK$50, marginal cost HK$45 → Lerner 0.10 (price near marginal cost, ample competition, thin markup — typical of homogeneous, substitutable markets). Price HK$200, marginal cost HK$40 → Lerner 0.80 (price far above marginal cost, strong power — typical of patented, branded or monopolised products). Lerner is often used with HHI for industrial-organisation analysis.
Note: Lerner links to demand elasticity: under profit maximisation, Lerner ≈ 1/|Ed|. The less elastic the demand, the higher the markup and Lerner. Marginal cost is hard to measure precisely (use estimates); high Lerner does not equal misconduct — brand/patents/innovation can justify it. A static, single-product measure. Pair with the marginal-cost and price-elasticity calculators.
FAQ
How to interpret the Lerner Index?
It ranges 0 to 1, reflecting the ability to price above marginal cost. 0 = price equals marginal cost (perfect competition, no pricing power); larger (closer to 1) = higher markup, stronger market power. 0.4 means 40% of price is above marginal cost. A monopolist's index is highest. Compare industries: low = competitive, high = strong market power/monopoly.
Why marginal cost, not average cost?
The Lerner Index measures market power; under perfect competition the equilibrium is price = marginal cost. Only when a firm prices above marginal cost does it show price influence — exactly what Lerner captures. Average cost would measure profit margin, not market power. In practice marginal cost is hard to get from accounts (mostly average/total cost), so it is often estimated — the main limitation.
Does a high Lerner mean exploiting consumers?
Not necessarily. High Lerner reflects strong pricing power that may be legitimate (brand, patents, innovation, service, scale) or concerning (excluding rivals, collusion, abuse of dominance). The number alone cannot judge exploitation; combine with entry barriers, conduct and consumer choice. It is better as a research/screening tool.
How is Lerner linked to elasticity and optimal pricing?
Lerner, demand elasticity and optimal pricing are three faces of one theory, linked by L ≈ 1/|Ed| (under profit maximisation, marginal revenue = marginal cost). (1) Market power comes from inelastic demand: the less elastic (|Ed| smaller), the larger 1/|Ed| and Lerner — higher markup. (2) The optimal-price formula P = MC × ε/(ε+1) is just a rearrangement of L ≈ 1/|Ed|. (3) To raise pricing power, lower your product's elasticity via brand, differentiation, patents, switching costs. So use price-elasticity to predict Lerner and optimal price; Lerner to read current power; optimal-price to compute the price — together they analyse pricing space.
How does Lerner differ from HHI; which for monopoly?
Both gauge competition/monopoly but from different angles — one result, one structure. Lerner L = (P − MC)/P measures a single firm's actual pricing outcome (behaviour/result-oriented): how much above marginal cost it prices. HHI sums squared market shares (structure-oriented): how concentrated the market is (one firm = 10000; more dispersed = smaller). Lerner needs price and marginal cost (hard to get); HHI needs only shares (easy, used in antitrust). They often correlate (concentrated → higher Lerner) but not absolutely: a concentrated market with credible potential entry may keep Lerner low; a fragmented market with tacit collusion may keep it high. So use both and corroborate: HHI to screen structure, Lerner to check if power is exercised, plus entry barriers and conduct. Pair with the marginal-cost and price-elasticity calculators.
Related Tools
References
Content review: Calculatorism Finance Team. Results are for reference only; please refer to the relevant authorities for the official figures.