What the Lerner Index?

The Lerner Index is also known as the Lerner Monopoly Power Index. It measures the degree of deviation between price and marginal cost to reflect the strength of monopoly power in the market.

Lerner Index

This provides us with a way to calculate the market structure based on monopoly power, thereby avoiding the problem of having to extrapolate monopoly power from sales data.

The calculation formula is: L = (P- MC) / P. In the formula:

LLerner Index,

Pprice,

MC

The shortcomings of the Lerner index are:

Data on marginal costs are difficult to obtain.

It reflects the actual behavior of the enterprise and does not reflect the potential monopoly or competition behavior of the enterprise. For example, a company's price reduction may be a strategic behavior that drives out competitors, but it does not mean that the market is competitive. It is precisely because the Lerner index itself reflects the degree of deviation between price and marginal cost when the market has dominant power, so it cannot reflect the restrictive pricing and predatory pricing behaviors adopted by enterprises in order to seek or consolidate monopoly status.

The quality of all products in the compared market must have a fixed, uniform standard and be quantifiable; otherwise, differences in product quality will cause price changes in the product, which will affect the accuracy of the conclusions.