A measure proposed by economist A.P. Lerner to measure monopoly or market power. The Lerner Index (LI) is :
In perfect competition, LI is equal to zero. The index defines monopoly power in terms of the slope of the demand curve. In the case of a profit maximizing firm in equilibrium, marginal revenue equals marginal cost and the LI is equal to the inverse of the elasticity of demand.
The LI is a static measure and does not indicate whether the deviation between price and marginal cost is a worthwhile cost to pay for possible innovation or new plant construction, or whether the disparity between marginal cost and price may reflect superior efficiency rather than the ability of a firm to charge high prices.
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