Lerner Index Calculator

Measure a firm's market power with the Lerner Index, L = (P − MC) / P. Enter the market price, marginal cost, and quantity sold to get the index, the markup, and the implied price elasticity of demand.

Quick Facts

Formula
L = (P − MC) / P
P is market price per unit and MC is marginal cost per unit; L runs from 0 (no market power) toward 1 (high market power).
Elasticity link
L = 1 / |Ed| at the profit-maximizing price
A higher Lerner Index implies a less elastic (more inelastic) demand curve at that price point.

Your Results

Calculated
Lerner Index (L)
-
(P − MC) / P — market power score, 0 to 1
Markup per unit
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Price minus marginal cost
Implied demand elasticity
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|Ed| = 1 / L at the profit-maximizing price
Total markup contribution
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Markup per unit × quantity sold

Ready

Enter price, marginal cost, and quantity sold, then press Calculate.

How the Lerner Index Calculator works

The Lerner Index, developed by economist Abba Lerner in 1934, is a standard measure of a firm's market power — its ability to price above marginal cost. It compares the price a firm charges to its marginal cost of production, expressed as a share of price. This calculator applies the textbook formula directly to the price, marginal cost, and quantity you enter.

The formula

For a market price P and a marginal cost MC, the Lerner Index is:

L = (P − MC) / P

The result is a value from 0 to 1 (it can be expressed as a percentage). L = 0 occurs when price equals marginal cost, the outcome expected under perfect competition. As MC falls relative to P, L rises toward 1, indicating greater pricing power. If price is set below marginal cost, L becomes negative, which signals a loss-making price rather than market power.

Worked example

Take a market price of $50 per unit and a marginal cost of $30 per unit. The index is L = (50 − 30) / 50 = 0.40. That means price exceeds marginal cost by 40% of the price — a moderate degree of market power. If 10,000 units are sold, the $20 per-unit markup contributes $200,000 in total markup revenue over marginal cost for the period.

How the index connects to demand elasticity

A well-known result from profit-maximization theory is that at a firm's profit-maximizing price, the Lerner Index equals the inverse of the absolute value of the price elasticity of demand: L = 1 / |Ed|. Rearranged, |Ed| = 1 / L. A firm facing more inelastic (less price-sensitive) demand can sustain a higher markup and therefore a higher Lerner Index; a firm facing highly elastic demand is pushed toward L = 0, close to competitive pricing.

Reading the result

  • L close to 0: price is close to marginal cost — consistent with a highly competitive market.
  • L roughly 0.25 to 0.5: a moderate markup over cost, common in markets with product differentiation or modest entry barriers.
  • L roughly 0.5 to 1: a large markup over cost, associated with significant pricing power such as strong brand differentiation, patents, or limited competition.

The Lerner Index is a single-market, single-point-in-time measure. It does not account for fixed costs, so a high index does not automatically mean a firm is highly profitable overall — fixed costs still have to be covered by the per-unit markup. It also assumes marginal cost is measured accurately, which can be difficult in practice since accounting cost data often reflects average cost rather than true marginal cost.

Frequently Asked Questions

What is the Lerner Index and what does it measure?
The Lerner Index measures a firm's market power as the gap between price and marginal cost, relative to price: L = (P − MC) / P. It ranges from 0, where price equals marginal cost as in perfect competition, to a value approaching 1, where marginal cost is small relative to price, as under strong monopoly power.
How is the Lerner Index calculated?
Subtract marginal cost from price, then divide by price: L = (P − MC) / P. For example, a $50 price with a $30 marginal cost gives L = (50 − 30) / 50 = 0.40, meaning price exceeds marginal cost by 40% of the price.
How does the Lerner Index relate to price elasticity of demand?
Under profit-maximizing pricing, the Lerner Index equals the inverse of the absolute value of the price elasticity of demand at that price: L = 1 / |Ed|. A higher Lerner Index implies a less elastic (more inelastic) demand curve, since firms with more market power can profitably price further above marginal cost when customers are less price-sensitive.
What does a Lerner Index of 0 or close to 1 mean?
An index of 0 means price equals marginal cost, the outcome expected under perfect competition where no firm can profitably raise price above cost. An index approaching 1 means marginal cost is very small relative to price, indicating substantial market power, which can occur in near-monopoly markets or industries with very low marginal production costs relative to price.

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