Lerner Index

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The Lerner Index, named after the economist Abba Lerner, describes a firm's market power. Mathematically, it is measured with the following formula: L=(P-MC)/P, where L is the Lerner Index, P is the selling price and MC is the marginal cost. The index ranges from a high of 1 to a low of 0, with higher numbers implying greater market power. For a perfectly competitive firm (where P=MC), L=0; such a firm has no market power.