Lerner Index Calculator
Enter the selling price and marginal cost of a product to measure a firm's market power using the Lerner Index. The index runs from 0 (perfect competition) to 1 (pure monopoly). Switch to Elasticity mode to derive the index directly from the price elasticity of demand, or use Reverse mode to find the price that achieves a target index. Results update instantly as you type.
Formula
Worked example
A firm charges $150 and incurs a marginal cost of $90. L = (150 - 90) / 150 = 60 / 150 = 0.40. This implies the price is 40% above MC relative to price, a high degree of market power consistent with an oligopoly or dominant firm. The implied price elasticity of demand at profit-maximising output is -1 / 0.40 = -2.5.
What is the Lerner Index?
The Lerner Index, introduced by British economist Abba Lerner in 1934, measures a firm's market power as the fraction by which price exceeds marginal cost, expressed as a share of the price. A value of 0 means the firm is a price-taker with no power to set prices above cost, as in perfect competition. A value of 1 is the theoretical maximum, reached when marginal cost approaches zero and the firm captures the entire price as markup. Most real-world markets fall somewhere in between. Regulators, economists, and antitrust practitioners use the index to identify firms with excessive pricing power, benchmark competitive conditions across industries, and assess whether a merger would meaningfully reduce competition.
How to use this calculator
Three calculation modes are available. In the default Price and Marginal Cost mode, enter the unit selling price and the marginal cost of one additional unit. The calculator returns the Lerner Index, the absolute and percentage markup, the implied price elasticity of demand, and a market-structure classification. In Price Elasticity mode, enter the price elasticity of demand (as a negative number) and the calculator derives the index from the relationship L = 1 / |elasticity|. In Reverse mode, enter a marginal cost and a target Lerner Index and the calculator solves for the required price using P = MC / (1 - L). All modes produce the same set of outputs and the same show-your-work breakdown so you can follow every step of the arithmetic.
The Lerner Index and price elasticity of demand
When a firm maximises profit, the Lerner Index equals the negative reciprocal of the price elasticity of demand it faces: L = -1 / Ed. This means that a firm in a highly elastic market (where consumers are very price-sensitive) cannot sustain a large markup: if Ed = -5, the maximum L is 0.20. Conversely, a firm facing inelastic demand (Ed = -1.2) could in theory push L to 0.83. A profit-maximising firm never operates in the inelastic region of its demand curve (|Ed| < 1), because cutting output would raise revenue while lowering cost. The elasticity relationship is useful in practice because elasticities can sometimes be estimated from market data when exact cost figures are commercially sensitive or unavailable.
Limitations and practical considerations
The Lerner Index is a snapshot in time. It ignores product differentiation, quality variation, and dynamic competition (firms may price aggressively today to build market share tomorrow). Because marginal cost is rarely published, analysts often substitute average variable cost or accounting cost as a proxy, which can distort comparisons across capital-intensive and labour-intensive industries. The index also fails to capture the source of market power: a firm with L = 0.50 might owe that position to a superior product, a legal patent, a natural monopoly infrastructure, or anticompetitive conduct. Pairing the Lerner Index with the Herfindahl-Hirschman Index (market concentration) and price-cost margin trend analysis gives a more complete picture.
Lerner Index ranges and market interpretation
| Index range | Market structure | Typical setting | Antitrust concern |
|---|---|---|---|
| 0.00 - 0.05 | Perfect competition | Commodity markets, stock exchanges | None |
| 0.05 - 0.15 | Low market power | Highly competitive retail, banking with many players | Minimal |
| 0.15 - 0.35 | Moderate market power | Oligopolies, differentiated products | Watch |
| 0.35 - 0.60 | High market power | Dominant firm, network platform, patent holder | High |
| 0.60 - 1.00 | Near-monopoly / monopoly | Pure monopoly, natural monopoly utility | Very high |
Standard economic classifications used in industrial organisation and antitrust analysis.
Frequently asked questions
What does a Lerner Index of 0 mean?
A Lerner Index of 0 indicates perfect competition. The firm charges a price equal to marginal cost and earns no economic profit above the competitive level. No individual firm can raise its price without losing all of its customers to rivals.
Can the Lerner Index be greater than 1 or negative?
Theoretically no. The index is bounded between 0 (P = MC, perfect competition) and 1 (MC = 0, pure monopoly). A negative value would imply the firm is pricing below marginal cost, which is unsustainable in the long run, though it can occur temporarily during predatory pricing or market-entry phases. Values above 1 imply a negative marginal cost, which is economically unusual outside a few settings such as pollution subsidies or congestion credits.
How is the Lerner Index related to price elasticity of demand?
At profit-maximising output, the Lerner Index equals the negative reciprocal of the price elasticity of demand: L = -1 / Ed. A firm facing perfectly elastic demand (Ed = -infinity) gets L = 0, consistent with perfect competition. A firm with inelastic demand in absolute terms faces L > 1, which is impossible at a profit maximum, confirming that profit-maximising firms always operate on the elastic portion of their demand curve.
What is a high Lerner Index?
A Lerner Index above 0.35 is generally considered high, signalling that the firm marks up price significantly above cost. Indices above 0.60 are typical of near-monopoly or legally protected monopoly positions. Pharmaceutical companies with patent-protected drugs and network-platform businesses with high switching costs often exhibit high values. Antitrust authorities pay close attention to firms with persistently elevated indices, especially if the position is shielded by barriers rather than genuine product superiority.
Why is marginal cost hard to measure in practice?
Marginal cost is the cost of producing exactly one more unit, which is an incremental concept rarely reported directly in financial statements. Firms typically report total or average costs, and separating fixed from variable costs requires detailed internal data. Analysts often approximate marginal cost with short-run average variable cost (total variable cost divided by output). For industries with high fixed costs and near-zero variable costs (software, pharmaceuticals after development), even small differences in the MC estimate can swing the Lerner Index substantially.
How do regulators use the Lerner Index?
Competition authorities use the Lerner Index as one of several tools to identify firms with market power that might harm consumers. A consistently high index can support an investigation into abusive pricing, excessive margins, or barriers to entry. In banking, the index is used to measure how competitive lending and deposit markets are, and it feeds into broader competition assessments by central banks and financial regulators. It is rarely used in isolation: it is usually triangulated with market share data, HHI, and direct consumer welfare analysis.