# Lerner Index Calculator

How much market power does a company have?

## What Is the Lerner Index?

The Lerner index is a measure of how much market power a firm has.

Lerner index values can vary from 0 to 1. The higher the value, the greater the market power of the firm.

A Lerner index of 0 indicates a market with perfect competition.

A Lerner index of 1 indicates a powerful monopolist.

## Why Is it Important?

• Understanding a firm's market power is key to understanding if prices can be raised without risking significant losses.

## Formula(s) to Calculate Lerner Index

• LERNER INDEX = (PRICE - MARGINAL COST) / PRICE

## Common Mistakes

• Thinking that the price of a given product is already set at the profit-maximizing price.
• Confusing market power for one product with market power for all items created by a company.
• Assuming that the existing set of customers is the only set of customers that can be attracted. Sometimes different types of customers exist at different price points.
• Not considering market size when evaluating a firm. A company that sells to a small cadre of customers within a tiny niche may be worth far less than a large firm that sells to the masses at a lower per-unit profit.