Lernerindeks

Lernerindeks, or the Lerner index, is a standard measure of a firm's market power. It is defined as L = (P − MC)/P, where P is the price charged for a good or service and MC is its marginal cost. The index represents the fraction of the posted price that constitutes a markup above marginal cost. In perfectly competitive markets, P = MC and L = 0; higher values indicate greater pricing power by a firm or firm group.

Relation to elasticity: If ε denotes the own-price elasticity of demand (negative), then P − MC = −P/ε, so L = −1/ε. Thus, demand that is more elastic yields a smaller Lerner index, while more inelastic demand yields a higher index.

Scope and interpretation: The Lerner index typically lies between 0 and 1 in standard settings, with values near 1 suggesting strong market power. It is a simple, static, single-market measure and does not capture dynamic competition, strategic interactions, product variety, or regulatory constraints.

Limitations and caveats: The calculation requires accurate estimates of marginal cost, which can be difficult; results can vary with tax treatment, cost allocation, and the inclusion of fixed costs. It also ignores multi-market behavior or price discrimination unless applied conditionally to a given market.

Uses: The Lerner index is widely used in empirical industrial organization as a compact indicator of market power, for cross-country or cross-industry comparisons, and as a component in welfare analysis and calibration of structural models.