Lerner Index Calculator

Measure a company’s market power with L = (P − MC) / P: from price & marginal cost, from demand elasticity, compare two companies, or solve a price/cost target — all in your browser.

Scope: the Lerner Index measures the market power of an individual company (the price–marginal-cost gap). To measure market concentration (sum of squared market shares of all firms), use our HHI calculator.

Note: this tool is educational for understanding market power calculations, not legal advice, not antitrust advice, and not business advice. The figures produced are descriptive, not an official assessment of any company or market.

1. Basic Lerner Index

L = (P − MC) ÷ P. Enter the selling price (P) and marginal cost (MC) in the same currency units.

Selling price (P) Marginal cost (MC)

Frequently asked questions about the Lerner Index

What is the Lerner Index?

The Lerner Index measures a company’s market power: how far the selling price (P) sits above marginal cost (MC). Its formula is L = (P − MC) / P. Values range from 0 to 1: L = 0 means price equals marginal cost (perfect competition, no market power), while L near 1 means the firm can set prices far above its costs (near monopoly). The measure was introduced by economist Abba Lerner in 1934.

How does the Lerner Index relate to demand elasticity?

For a profit-maximizing firm with constant marginal cost, the Lerner rule applies (also called the inverse-elasticity rule): L = −1 / Ed, where Ed is the price elasticity of demand facing the firm (negative). Example: if Ed = −2.5 then L = 0.40. That is, the more inelastic demand is (customers less sensitive to price), the greater the firm’s market power. Note this relationship holds at the profit-maximizing point, and Ed here is the elasticity facing the firm, not necessarily the same as overall market elasticity.

What is the difference between the Lerner Index and HHI?

They measure different things. The Lerner Index measures the market power of an INDIVIDUAL COMPANY via its price–marginal-cost gap — no market-share data needed. HHI (Herfindahl-Hirschman Index) measures MARKET concentration: the sum of squared market shares of all firms in that market. A company can have a high Lerner Index in a low-HHI market (e.g. due to strong product differentiation), and vice versa. To measure market concentration, use our <a href="/tools/hhi/">HHI calculator</a>.

How do you interpret Lerner Index values from 0 to 1?

General guide used by this calculator (not a legal threshold): L = 0 means perfect competition; 0–0.25 low market power; 0.25–0.5 moderate market power; 0.5–0.75 high market power; above 0.75 very high market power, near monopoly. Example: P = 10 and MC = 6 give L = (10 − 6) / 10 = 0.40 — moderate market power. This is a descriptive guide for education; actual competition assessments use many factors beyond this figure.

What assumptions are used when computing from elasticity?

The elasticity mode uses three assumptions: (1) constant marginal cost at the relevant output level; (2) the firm sets price to maximize profit so marginal cost equals marginal revenue; (3) Ed is the price elasticity of demand facing that firm, negative and more elastic than −1 so L stays in the reasonable 0–1 range. If these assumptions fail, use the basic mode with observed price and marginal cost.

What are the limitations of the Lerner Index?

There are three main limitations. First, marginal cost is hard to observe — real company cost data is rarely public, so L is often estimated, not computed exactly. Second, L is a static snapshot: it captures no quality differentiation, innovation, entry barriers, or market dynamics. Third, L does not judge whether market power was obtained fairly — this figure is descriptive, not proof of competition-law violation.

Can the Lerner Index be negative or greater than 1?

Yes, but both are outside the reasonable 0–1 range. Negative L occurs when price is below marginal cost (P < MC), e.g. a firm selling at a loss temporarily. L above 1 comes from the elasticity formula when demand is inelastic (|Ed| < 1); in theory, a profit-maximizing firm would not operate on the inelastic segment of demand, so such a result signals the profit-maximization assumption fails on that data.

Disclaimer: this Lerner Index Calculator is an educational tool for understanding company market power calculations. Its results are not legal advice, not antitrust advice, and not business advice — company pricing and strategy decisions involve many factors beyond this figure.

Lerner Index Calculator

1. Basic Lerner Index

2. Lerner Index from demand elasticity

3. Two-company comparator

Company A

Company B

4. Price / marginal cost solver

Frequently asked questions about the Lerner Index

What is the Lerner Index?

How does the Lerner Index relate to demand elasticity?

What is the difference between the Lerner Index and HHI?

How do you interpret Lerner Index values from 0 to 1?

What assumptions are used when computing from elasticity?

What are the limitations of the Lerner Index?

Can the Lerner Index be negative or greater than 1?

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