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What does it mean if a firm's Lerner's Index is equal to 0.4?

What does it mean if a firm's Lerner's Index is equal to 0.4?

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Answer #1

Lerner’s index used by Economists to evaluate the monopoly power, means power of market. The Lerner index is the percentage of market price over the marginal cost. The learner index represents the positive number (L>=0), rising the amount of market power. Learner index varies from a low value of 0 to a high of 1. If a firm’s Lerner’s index is equal to 0.4 it means the firm has monopoly power in the market. If the Lerner index shows a higher value it means the firm can charge more over its MC, hence the monopoly power is greater.

The learner index is represented as

= P-MC/P

Where P is the price of the good which is set by the firm

And MC marginal cost.

Lerner’s index measures the percent mark-up that a firm is able to charge over its MC.

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