Lerner Index Calculator — Market Power
The Lerner Index measures how far a firm's price exceeds its marginal cost. Enter price and marginal cost to get the index, price–cost markup, and implied demand elasticity.
0 = perfect competition • 1 = pure monopoly
- 1
Price − Marginal cost
100 − 60 = 40The price–cost gap: how much price exceeds marginal cost. - 2
Lerner Index
40 ÷ 100 = 0.4000
How does this calculator work?
Lerner Index L = (P − MC) / P measures market power from 0 (competitive) to 1 (monopoly). At profit-maximising output L = −1/ε_d. Enter price and marginal cost to get L, the markup percentage over MC, and the implied demand elasticity.
Formula
How this is calculated
The Lerner Index, introduced by Abba Lerner in 1934, quantifies market power as the relative markup of price over marginal cost: L = (P − MC) / P. In a perfectly competitive market, free entry forces price to equal marginal cost, so L = 0. A monopolist can set price far above MC, pushing L toward 1. Most real-world markets fall between these extremes.
At a profit-maximising output, the Lerner Index equals the negative inverse of the price elasticity of demand: L = −1/ε_d. This links pricing power directly to demand sensitivity. An elastic demand (|ε_d| > 1) constrains markups; inelastic demand permits higher ones. The implied elasticity reported here assumes the firm is profit-maximising — it is not meaningful for regulated, loss-making, or quantity-constrained firms.
Practical limitations: marginal cost is rarely observed directly and is typically estimated from accounting data or econometric models. A negative Lerner Index (MC > P) can occur in regulated industries or during predatory pricing and does not represent a meaningful market-power measure. Values above 1 are theoretically impossible under profit-maximisation but can appear if inputs are measured inconsistently.
Frequently asked questions
40% of the price is pure markup above marginal cost — a significant departure from competitive pricing. The implied demand elasticity at that point is −1/0.4 = −2.5, meaning a 1% price rise would reduce quantity demanded by about 2.5%.
A negative L (MC > P) can occur in regulated or loss-leading pricing; L > 1 would require MC < 0, which is unusual but theoretically possible for some network or digital goods with near-zero marginal cost and subsidy income.
The formulas (P − MC)/P are identical; "Lerner Index" is the economics term, "price–cost margin" the accounting/finance equivalent. Some sources define PCM as (P − MC)/MC (a markup ratio), so always check which definition is used.
Also known as
TG we-Calculate Editorial Team. (2026). Lerner Index Calculator — Market Power [Online calculator]. TG we-Calculate. https://we-calculate.com/calculator/lerner-index-calculator
TG we-Calculate Editorial Team. "Lerner Index Calculator — Market Power." TG we-Calculate. 2026. https://we-calculate.com/calculator/lerner-index-calculator.
TG we-Calculate Editorial Team, "Lerner Index Calculator — Market Power," TG we-Calculate, 2026. [Online]. Available: https://we-calculate.com/calculator/lerner-index-calculator
@misc{wecalculate_lerner_index_calculator, title = {Lerner Index Calculator — Market Power}, author = {{TG we-Calculate Editorial Team}}, howpublished = {\url{https://we-calculate.com/calculator/lerner-index-calculator}}, year = {2026}, note = {TG we-Calculate} }
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