Lerner Index Calculator
Answers the Question
How much market power does a company have?
Calculator for Lerner Index
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.