## Lerner Index Calculator

The **lerner index calculator** helps measure the degree of **market power** possessed by a firm. Named after economist **Abba Lerner**, this index provides insights into how much a company can influence **prices** in its industry.

`Lerner Index = (Price - Marginal Cost) / Price`

Lerner Index = (1000 - 600) / 1000 = 0.4 or 40%

## Lerner Index Examples Chart

Industry | Company | Price | Marginal Cost | Lerner Index | Interpretation |
---|---|---|---|---|---|

Technology | TechGiant | $1200 | $800 | 0.33 | Moderate market power |

Pharmaceuticals | MediCorp | $150 | $30 | 0.80 | High market power |

Fast Food | BurgerKing | $5 | $3.50 | 0.30 | Competitive market |

Luxury Cars | PremiumAuto | $80,000 | $60,000 | 0.25 | Some market power |

Generic Groceries | BasicFoods | $2 | $1.90 | 0.05 | Highly competitive |

## Lerner Index Formula

The **Lerner Index Formula** is expressed as:

`L = (P - MC) / P`

Where:

L= Lerner IndexP= PriceMC= Marginal Cost

Consider a popular **coffee chain** that sells a signature latte for **$5**. After analyzing their costs, they determine that the marginal cost of producing each latte (including ingredients, labor, and overhead) is **$2.50**.

Applying the formula:

`L = (5 - 2.50) / 5 = 0.5 or 50%`

This result suggests that the coffee chain has significant **market power**, allowing them to price their latte at twice the marginal cost.

## How do you calculate the Lerner index?

Determine the priceof the product or service.

Calculate the marginal costof producing one additional unit.Apply the

Lerner Index formula: (Price – Marginal Cost) / Price

Let’s walk through an example using a airline company, **SkyHigh Airways**. SkyHigh offers flights between two major cities for **$300** per ticket.

Their analysis shows that the marginal cost of adding one more passenger to a flight (including fuel, in-flight service, and administrative costs) is **$180**.

To calculate the **Lerner Index**:

Price =

$300Marginal Cost =

$180Lerner Index = (300 – 180) / 300 = 0.4 or 40%

`This result indicates that `**SkyHigh Airways** has a moderate level of **market power**, possibly due to limited competition on this particular route or superior service quality that allows them to charge a premium.

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