What does the Lerner index estimate?
The Lerner index is a compact measure of the gap between a firm’s price and the marginal cost of supplying one more unit. It expresses that gap as a share of price. A result of 0 means price equals marginal cost. A positive result means price exceeds marginal cost, while a value closer to 1 means the marginal cost is a relatively small part of the price. Economists use the measure as one indicator of market power, but it should not be treated as a complete competition test or as proof of unlawful conduct.
The calculator uses the standard expression (Price − Marginal cost) ÷ Price. With a price of $500 and marginal cost of $350, the result is 0.3000. In percentage language, 30.00% of the price is above marginal cost, while 70.00% covers the incremental production or service cost.
How should each input be entered?
Price per unit
Use the actual transaction price for one comparable unit, net of discounts that routinely apply. The field is required and must be greater than zero because price is the denominator of the formula. Higher price, holding marginal cost constant, raises the index. A common error is mixing a list price with a net marginal cost measured after rebates or channel fees. Keep both inputs aligned to the same product, market, customer type, currency, and time period.
Marginal cost per unit
Marginal cost is the additional cost caused by producing or serving one more unit. Depending on the business, this can include direct materials, incremental labor, transaction processing, shipping, usage-based cloud infrastructure, or other truly variable costs. It is required and should be nonnegative. Higher marginal cost, holding price constant, lowers the Lerner index. Avoid substituting total average cost without noting the limitation: rent, headquarters payroll, depreciation, and other fixed overhead may matter greatly for profit but may not change when one additional unit is produced.
How are the results interpreted?
The primary result is shown as a decimal because that is the conventional form of the index. The accompanying percentage expresses the same number as a share of price. A low positive value indicates that price is close to marginal cost. A larger positive value indicates a wider price–cost margin, which may be consistent with differentiated products, intellectual property, capacity constraints, switching costs, brand strength, regulation, or limited competition. Those explanations require separate evidence.
- Price–cost gap is the dollar difference between price and marginal cost. It is not the same as net profit because it excludes fixed and shared expenses.
- Marginal cost share is marginal cost divided by price. Together with the Lerner percentage, it adds to 100% whenever marginal cost is between zero and price.
- Markup on marginal cost divides the dollar gap by marginal cost. It answers a different question from the Lerner index, so the two percentages should not be confused.
- Implied demand elasticity applies the simplified Lerner rule, elasticity = −1 ÷ index, only when the index is positive. It is an economic benchmark, not an observed elasticity estimate.
If marginal cost exceeds price, the raw formula becomes negative. This calculator displays that outcome as a below-marginal-cost warning rather than forcing the value to zero. Such a result can occur during promotions, penetration pricing, inventory liquidation, cross-subsidization, measurement error, or temporary capacity decisions. It should be investigated rather than interpreted as ordinary market power.
What do the chart and sensitivity table show?
The donut chart splits the current unit price into marginal cost and the price–cost margin. It draws only when the decomposition is economically drawable: price must be positive and marginal cost must lie between zero and price. The legend and data table are generated from the same values, so the dollar amounts and percentages should agree exactly.
The sensitivity table holds price fixed and moves marginal cost around the current assumption. It helps identify how estimation uncertainty in marginal cost changes the index. Because real markets are dynamic, the table does not model demand responses, competitor pricing, product substitution, or changes in volume. A firm should combine the Lerner index with evidence on market definition, substitution, entry barriers, customer switching, and competitive conduct.
What are the main limitations?
Marginal cost is often difficult to observe, especially in software, platforms, financial services, healthcare, and businesses with joint production. The index also does not capture fixed-cost recovery, innovation investment, quality differences, multi-product pricing, network effects, or regulated pricing. A high margin may fund substantial fixed costs and still produce modest economic profit. Conversely, a low index does not automatically prove vigorous competition if costs are measured incorrectly.
For broader context, review the Federal Trade Commission’s market power materials, the U.S. Department of Justice overview of antitrust laws, the DOJ’s discussion of market definition, and the OECD material on market power in digital markets. These sources reinforce that market power analysis depends on facts beyond one ratio.
How can the calculator be used responsibly?
Use consistent unit-level data, document how marginal cost was estimated, and compare results across time, products, firms, or scenarios only when definitions are genuinely comparable. Treat the output as a diagnostic metric rather than a legal conclusion, valuation opinion, or pricing recommendation. The Excel download captures the current inputs, calculations, breakdown, sensitivity rows, and methodological notes so the assumptions can be reviewed outside the webpage.