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 Index
- P = Price
- MC = 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 price of the product or service.
Calculate the marginal cost of 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 = $300
Marginal Cost = $180
Lerner 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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