How to Calculate the Lerner Index
The Lerner index equals price minus marginal cost, divided by price, and measures market power on a scale from 0 to 1.
The Lerner Index formula
Calculator
Enter price and marginal cost to get the Lerner index and the demand elasticity it implies at that output.
The price at the profit-maximizing quantity where MR = MC.
The cost of the last unit at that same quantity.
37.5% of the price is markup over marginal cost. The index runs from 0 for a price taker up to a ceiling of 1.
- Markup as a share of price
- 37.5%
- Dollar markup (P − MC)
- $15
- Implied price elasticity of demand
- 2.67
- Market power reading
- Price above marginal cost
The Lerner index written as a percent, which is the share of the price that is not marginal cost.
The gap the index divides by price.
At the profit-maximizing output the index equals 1 divided by the absolute value of elasticity, so demand here has an elasticity near 2.67.
Zero means a price taker. The closer the index sits to 1, the further price stands above marginal cost.
How to calculate Lerner Index, step by step
- 1Find price and marginal cost. Use the firm's price and its marginal cost at the profit-maximizing quantity where MR = MC.
- 2Subtract. The gap P − MC is the firm's markup in dollars.
- 3Divide by price. Lerner index = (P − MC) ÷ P, which gives a pure number with no units.
- 4Interpret the result. A value of 0 means no market power because P = MC; values closer to 1 mean price sits far above marginal cost.
Worked example: Lerner Index
A profit-maximizing firm charges $40 with marginal cost of $25. The Lerner index = (40 − 25) ÷ 40 = 15 ÷ 40 = 0.375, so 37.5% of the price is markup over marginal cost.
Lerner Index questions
What is the Lerner index for a perfectly competitive firm?
Zero, because a price taker sets P = MC, which leaves nothing in the numerator.
Can the Lerner index be greater than 1?
No, it tops out at 1, since exceeding 1 would require negative marginal cost; a value near 1 already means price is many times marginal cost.
How does the Lerner index relate to elasticity?
At the profit-maximizing output the index equals 1 divided by the absolute value of price elasticity of demand, so less elastic demand means more market power.
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