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 set price above marginal cost, with values ranging from 0 (perfect competition) to 1 (monopoly).

2. How Does the Calculator Work?

The calculator uses the Lerner Index formula:

Where:

• \( Price \) — The price set by the firm (in GBP)
• \( Marginal\ Cost \) — The cost to produce one additional unit (in GBP)

Explanation: The index shows what portion of price represents market power rather than production costs. Higher values indicate greater market power.

3. Importance of Lerner Index

Details: The Lerner Index is widely used in economics to assess market competitiveness, analyze antitrust cases, and measure monopoly power in UK markets.

4. Using the Calculator

Tips: Enter price and marginal cost in GBP. Price must be greater than marginal cost. The result is a decimal between 0 and 1.

5. Frequently Asked Questions (FAQ)

Q1: What does a Lerner Index of 0.5 mean?
A: An index of 0.5 means the firm's price is twice its marginal cost, indicating significant market power.

Q2: What's a typical Lerner Index value?
A: In competitive markets, values are close to 0. In monopolies, values approach 1. UK retail banking averages around 0.3-0.4.

Q3: How is this different from markup pricing?
A: The Lerner Index is mathematically equivalent to (P-MC)/P, while markup is (P-MC)/MC. Both measure market power but scale differently.

Q4: What are limitations of the Lerner Index?
A: It assumes accurate cost measurement and doesn't account for potential competition or regulatory constraints.

Q5: How is this used in UK policy?
A: The Competition and Markets Authority (CMA) uses such metrics to assess market competitiveness and potential anti-competitive practices.