1. What is the Lerner Index?

The Lerner Index measures a firm's market power by comparing the difference between price and marginal cost relative to price. It 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)
• \( P \) — Price (USD)
• \( MC \) — Marginal Cost (USD)

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

3. Importance of Lerner Index

Details: The Lerner Index is crucial for antitrust analysis, measuring monopoly power, and assessing competitive conditions in markets.

4. Using the Calculator

Tips: Enter price and marginal cost in USD. Price must be greater than marginal cost for valid calculation.

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 (no market power).

Q2: What's a typical Lerner Index value?
A: Most competitive markets range 0-0.2, while monopolies may approach 1 (but rarely reach it).

Q3: How is this different from markup pricing?
A: The Lerner Index is mathematically equivalent to (P-MC)/P, which relates directly to price elasticity of demand.

Q4: What are limitations of the Lerner Index?
A: Requires accurate marginal cost data, assumes profit maximization, and doesn't account for potential competition.

Q5: Can the index be negative?
A: Normally no, as price below marginal cost would be irrational for profit-maximizing firms.