1. What is the Lerner Index?

The Lerner Index is a measure of a firm's market power. It calculates the extent to which a firm can mark up price above marginal cost. The index ranges from 0 (perfect competition) to 1 (monopoly).

2. How Does the Calculator Work?

The calculator uses the Lerner Index formula:

Where:

• \( LI \) — Lerner Index (decimal)
• \( Elasticity \) — Price elasticity of demand (unitless)

Explanation: The Lerner Index is inversely proportional to the price elasticity of demand. More elastic demand leads to lower market power.

3. Importance of Lerner Index

Details: The Lerner Index is used in industrial organization to measure monopoly power, assess market competitiveness, and inform antitrust policy.

4. Using the Calculator

Tips: Enter the price elasticity of demand (must be greater than 0). The calculator will compute the corresponding Lerner Index.

5. Frequently Asked Questions (FAQ)

Q1: What does a Lerner Index of 0 mean?
A: A value of 0 indicates perfect competition where price equals marginal cost (P = MC).

Q2: What does a Lerner Index of 1 mean?
A: A value of 1 indicates monopoly power where price is set significantly above marginal cost.

Q3: What are typical Lerner Index values?
A: Most competitive markets have values between 0-0.2, while concentrated industries may have values above 0.4.

Q4: What are limitations of the Lerner Index?
A: It requires accurate elasticity estimates and assumes profit maximization. It may not capture dynamic competition.

Q5: How is this related to markup pricing?
A: The Lerner Index equals (P-MC)/P, showing the percentage markup over marginal cost.