Lerner Index Calculator 2026
Measure Market Power & Monopoly Degree
Based on Abba P. Lerner's 1934 theory of monopoly power
What is the Lerner Index?
๐ Lerner Index Definition
The Lerner Index (also called the Lerner Monopoly Index) is a measure of a firm's market power. It calculates the percentage markup of price over marginal cost. Developed by economist Abba Lerner in 1934, it remains a fundamental tool in industrial organization economics.
The index ranges from 0 to 1: A value of 0 indicates perfect competition (price equals marginal cost), while values approaching 1 indicate significant monopoly power (price far exceeds marginal cost).
Lerner Index Calculator
Calculate from Price and Marginal Cost
Calculate from Price Elasticity of Demand
Find Price or MC from Lerner Index
Low Power
Moderate
High Power
The Lerner Index Formula
Basic Formula
Where P is the price charged and MC is the marginal cost of production.
Relationship to Price Elasticity
Where ฮต is the absolute value of the price elasticity of demand. This relationship holds for profit-maximizing firms.
Finding Price from Lerner Index
Finding Marginal Cost from Lerner Index
- Identify the Price: Determine the selling price of the product or service.
- Calculate Marginal Cost: Find the cost of producing one additional unit.
- Apply the Formula: L = (P โ MC) / P
- Interpret the Result: Values closer to 0 indicate competition; closer to 1 indicates monopoly power.
- Compare to Industry: Benchmark against typical values for your industry.
Interpreting the Lerner Index
| Lerner Index Range | Market Power Level | Market Structure | Interpretation |
|---|---|---|---|
| 0.00 | None | Perfect Competition | P = MC; no markup possible |
| 0.01 - 0.20 | Very Low | Highly Competitive | Near-competitive markets, commodities |
| 0.20 - 0.40 | Low-Moderate | Monopolistic Competition | Some product differentiation |
| 0.40 - 0.60 | Moderate | Oligopoly | Significant market power |
| 0.60 - 0.80 | High | Concentrated Market | Strong pricing power |
| 0.80 - 1.00 | Very High | Near-Monopoly | Dominant market position |
Lerner Index by Industry (Examples)
| Industry | Typical Lerner Index | Market Power | Notes |
|---|---|---|---|
| Agriculture (Commodities) | 0.01 - 0.05 | Very Low | Near-perfect competition |
| Retail Grocery | 0.05 - 0.15 | Low | Competitive, thin margins |
| Restaurants | 0.15 - 0.30 | Low-Moderate | Some differentiation |
| Apparel/Fashion | 0.30 - 0.50 | Moderate | Branding matters |
| Automobiles | 0.20 - 0.40 | Moderate | Oligopoly structure |
| Pharmaceuticals (Branded) | 0.60 - 0.90 | High | Patent protection |
| Software/Tech Giants | 0.50 - 0.80 | High | Network effects, switching costs |
| Utilities (Regulated) | 0.10 - 0.30 | Low (Regulated) | Price controls limit markup |
Lerner Index vs Other Market Power Measures
| Measure | What It Measures | Range | Data Required |
|---|---|---|---|
| Lerner Index | Price markup over MC | 0 to 1 | Price, Marginal Cost |
| HHI (Herfindahl) | Market concentration | 0 to 10,000 | Market shares |
| Concentration Ratio (CR4) | Top 4 firms' share | 0% to 100% | Market shares |
| Rothschild Index | Industry vs firm elasticity | 0 to 1 | Demand elasticities |
| Bain Index | Excess profits | Varies | Profit, invested capital |
Limitations of the Lerner Index
โ ๏ธ Practical Limitations
- Marginal cost is difficult to measure in practice
- Assumes single product (complex for multi-product firms)
- Static measure; doesn't capture dynamic competition
- Doesn't account for potential competition
- Regulation may artificially constrain L
โ Advantages
- Theoretically grounded in economics
- Direct measure of pricing power
- Works at firm level (not just industry)
- Links to demand elasticity
- Useful for antitrust analysis
Official Resources
Frequently Asked Questions
"Good" depends on perspective. For firms, higher is better (more pricing power). For consumers and competition, lower is better (competitive pricing). Regulators often scrutinize industries with L > 0.5. Competitive markets typically have L < 0.2.
L = (P โ MC) / P. Example: If price is $100 and marginal cost is $60, L = (100 โ 60) / 100 = 0.40. This means the firm marks up 40% above marginal cost.
L = 0 means Price equals Marginal Cost (P = MC), the condition for perfect competition. The firm has no market power and cannot charge above cost.
Theoretically, L = 1 when MC = 0 (zero marginal cost), which occurs for pure digital goods or content with near-zero reproduction cost. In practice, values above 0.8 are rare and indicate extreme market power.
For a profit-maximizing firm: L = 1/|ฮต|, where ฮต is price elasticity of demand. If demand elasticity is 2, then L = 0.5 (50% markup). Higher elasticity means more substitutes and lower pricing power.
Abba P. Lerner, a British-American economist, introduced it in his 1934 paper "The Concept of Monopoly and the Measurement of Monopoly Power." It remains a cornerstone of industrial organization economics.
Firms rarely track true marginal cost. Average cost is often used as a proxy, but this can over/underestimate MC. Multi-product firms have joint costs that are difficult to allocate. This is the main practical limitation of the Lerner Index.
No, having market power is not illegal. Antitrust law focuses on how that power was acquired (through illegal means) or abused (anticompetitive behavior), not the mere existence of pricing power. Patents legitimately create high L values.
They measure different things. HHI measures market concentration (structure); Lerner measures pricing power (conduct/performance). A firm could have high HHI but low Lerner if regulated, or moderate HHI but high Lerner if differentiated. Both are useful together.
Mathematically, if P < MC (selling below cost), L would be negative. This can occur with predatory pricing, loss leaders, or subsidized goods. Negative L indicates the firm is not profit-maximizing on that product.
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Last Updated: January 2026