Lerner Index

The Lerner index, formalized in 1934 by Abba Lerner, describes a firm's market power. It is defined by:

${\displaystyle L={\frac {P-MC}{P}}}$

where P is the market price set by the firm and MC is the firm's marginal cost. The index ranges from a high of 1 to a low of 0, with higher numbers implying greater market power. For a perfectly competitive firm (where P=MC), L=0; such a firm has no market power. When MC=0, Learner's index is equal to unity, indicating the presence of monopoly power.

The main problem with this measure, however, is that it is almost impossible to gather the necessary information on prices and particularly costs.

The Lerner Index is equivalent to the negative inverse of the formula ${\displaystyle E_{d}}$ for price elasticity of demand facing the firm, when the chosen price, P, is that which maximizes profits available because of the existence of market power.

${\displaystyle L={\frac {-1}{E_{d}}}}$

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