What Lerner index?
The Lerner Index is a tool used in economic research and analysis. It consists of a value between 0 and 1, which helps measure the market power of individual business or society. Companies with a high level of market force are often considered a monopoly that can pose a threat to the competitive nature of capitalist society. As part of the Lerner index, a net monopoly company that dominated the entire market with the product would gain a value of 1. A company that operated on a purely competitive market and would have little control over prices and the market would be closer to 0. Today, the Lerner Index is one of the most used tools for measuring market force. It is often used in conjunction with the Herfindahl-Hirschman index, which measures the market concentration. The combination of these two theories is able to use the strengths of each of them to get the best possible playckers about how many individual companies control the market.
To calculate the market force of the company, economists rely on equation l = (P-MC)/P, where L is the value of the Lerner index. P in this equation is the market price that the company charges for its products, while MC is the limit cost caused by the company for each product. By adopting the negative inversion of the Lerner index, analysts can find the elasticity of the demand for the product of the company. The elasticity of demand ranges from -1 to 0 and measures how likely consumers stop buying a product or find a replacement if the price increases.
In general, the more elastic demand is for the product, the lower the market force of the company and the lower value of the Lerner index. This means that the company has little price control because customers simply switch to an alternative product. The lower the elasticity of the demand, the higher the market force and the higher the value of the Lerner index. For example, a special cancer medicine may have highly inflexible demandVKU, which means that customers will pay any price for it. In this case, the manufacturer of this drug has huge market force and the value of the Lerner index of almost 1
The Lerner Index is an important economic and political tool that helps the government to protect consumers from the impact of the monopoly. Without government intervention, monopolistic companies could participate in predatory prices or manipulate the market to prevent new companies from entering. Governments and other regulators use the Lerner index as one possible indication of the company's market force. To reduce the market force, the government may require the company to break into smaller entities or take its patents that other companies could produce the same products and ignite the competition.