Lerner Index Calculator - Market Power Analysis
Calculate the Lerner index, markup, and marginal-cost share from price and marginal cost. Measure market power before you price.
Enter a product price and marginal cost to compute the Lerner index, dollar markup, and the share of price that covers marginal cost.
Lerner Index Calculator - Market Power Analysis
Calculate the Lerner index, markup, and marginal-cost share from price and marginal cost. Measure market power before you price.
About the Lerner Index Calculator
The Lerner index calculator measures how far a selling price sits above marginal cost, which is the classic microeconomic gauge of market power. Analysts, students, and strategy teams use it when a firm can set price rather than take the market price as given. Enter the observed or planned price and the incremental cost of producing one more unit. The result is an educational pricing diagnostic, not a finding of illegal monopoly, a regulator filing, or a valuation of the firm.
The Lerner index equals (P minus MC) divided by P and is shown as a percentage. A perfectly competitive firm that prices at marginal cost has an index of zero. A firm that can hold price well above incremental cost shows a higher index. Markup is the dollar gap P minus MC. Marginal-cost share is MC divided by P, so the Lerner index and the cost share always add to 100 percent when both are expressed on the same price base. If price is $10 and marginal cost is $6, the index is 40 percent, markup is $4, and cost share is 60 percent.
In theory the Lerner index also equals 1 divided by the absolute value of the price elasticity of demand at the profit-maximizing point. A high index therefore hints that customers are relatively insensitive to price, while a low index hints that rivals or substitutes constrain pricing. Use the Lerner index calculator to compare a branded SKU with a private-label analog, to sanity-check a planned list-price increase, or to discuss how capacity, patents, or switching costs might support a markup.
Marginal cost is not average cost. Overhead, sunk R&D, and allocated corporate charges do not belong in MC unless they truly change when one more unit is produced. Using average cost in place of MC inflates the index and overstates pricing power. Transfer prices, peak versus off-peak costs, and promotional discounts can all move P or MC. Keep the two inputs on the same unit, currency, and time period.
Treat the output as a snapshot. Regulation, new entry, and retailer bargaining can compress a markup even when the current index looks high. For competition-policy work, pair the Lerner index with concentration, diversion ratios, and a documented cost study. Re-run the Lerner index calculator whenever list price, discounts, or incremental production cost change.
Lerner Index Examples
These examples apply Lerner index = (P - MC) / P to prices and marginal costs you can re-enter in the form.
| Scenario | Output | Planning note |
|---|---|---|
| Price $200, marginal cost $80 | 60.00% Lerner index; $120.00 markup; 40.00% marginal-cost share | A large gap above incremental cost is typical of differentiated or capacity-constrained products. |
| Price $10, marginal cost $9 | 10.00% Lerner index; $1.00 markup; 90.00% marginal-cost share | Near-competitive pricing leaves little room for further discounting without cutting into cost. |
| Price $15, marginal cost $5 | 66.67% Lerner index; $10.00 markup; 33.33% marginal-cost share | A two-thirds index implies demand is relatively inelastic at this price if the firm is optimizing. |
How to Calculate the Lerner Index
- Enter the selling price for one unit in the same currency you use for cost.
- Enter marginal cost, meaning the incremental cost of one more unit, not average cost.
- Calculate the Lerner index, dollar markup, and marginal-cost share.
- Compare the index with a rival product or with a lower promotional price.
Lerner Index Calculator FAQ
What is a good Lerner index?
There is no universal target. Competitive markets cluster near zero, while branded or regulated monopolies can post much higher values. Interpret the index beside elasticity, rivals, and whether marginal cost was measured cleanly.
Is the Lerner index the same as margin?
It is a markup over marginal cost, not accounting gross margin over average cost. Substituting average cost will not match the economic definition used here.
Can the Lerner index be negative?
Yes, if price is below marginal cost. That can happen in promotions, loss-leader pricing, or when MC is measured on a peak-cost basis that the posted price does not cover.
How does elasticity relate to the index?
At a profit-maximizing point, Lerner = 1 / |elasticity|. A 25 percent index is consistent with an elasticity of about 4 in absolute value, assuming the firm is optimizing and MC is correct.
Should I use wholesale or retail price?
Use the price the decision-maker actually controls, matched to the marginal cost of that same unit. Mixing retail P with factory MC mixes two margins and overstates market power at either stage.