Lerner index

The Lerner index, formalized in 1934 by Abba Lerner, describes a firm's market power. It is defined by: The Lerner index, formalized in 1934 by Abba Lerner, describes a firm's market power. It is defined by: L = P − M C P {displaystyle L={frac {P-MC}{P}}} where P is the market price set by the firm and MC is the firm's marginal cost. The index ranges from a high of 1 to a low of 0, with higher numbers implying greater market power. For a perfectly competitive firm (where P=MC), L=0; such a firm has no market power. When MC=0, Lerner's index is equal to unity, indicating the presence of monopoly power.