Question

I need to write a forum on lerner index from a managers perspective in economics not less than 75 words. Lerner index- A measure of the difference between price and marginal cost as a fraction of the product's price. Could you give me an example of lerner index. And what can I name the post.

Answer 1

Lerner index and degree of market power

Lerner index is a tool used by managers/firms to analyse the mark-up percentage earned by them over the price charged. It is given by

L.I. = (P - MC)/P

The Lerner index has the following implications

• When price is equal to marginal cost, as in the case of competitive markets, the value of Lerner Index is 0. This reflects stiff competition in the market.
• When price is higher enough than marginal cost, as in the case of monopoly, the value of Lerner Index is 1. This reflects no competition in the market.
• If the Lerner index has a value that lies between 0 and 1, the market structure will either follow monopolistically competitive (close to 0) or the market structure will follow oligopoly (close to 1)

Hence the value of Lerner Index is helpful in analysing the market power of a firm and the market in which the firm is operating. Lerner Index is also related to the mark-up as

P = (1 / (1 - L) x M

Where M is the marginal cost and P is the price. L is Lerner Index