Analyze the market power of firms with our interactive Lerner Index Calculator.
Lerner Index:
Interpretation:
The Lerner Index is a vital economic tool for assessing market power. It is calculated by comparing the price of a product to its marginal cost. A high index value indicates a firm's ability to charge significantly above production costs, showcasing strong market power.
To compute the Lerner Index, simply enter the price and marginal cost of a product. The calculator will provide an index value, along with an interpretation of the firm's market power.
Consider a firm selling a product for $500 with a marginal cost of $350. The Lerner Index is computed as:
Lerner Index = (Price - Marginal Cost) / Price
Substituting values: (500 - 350) / 500 = 0.3. This indicates moderate market power.
A Lerner Index of 0 signifies perfect competition, where prices equal marginal costs. A higher index, closer to 1, indicates a monopoly or reduced competition.