Lerner Index is a measure of monopoly power which equals the markup over marginal cost as percentage of price. Its value ranges from 0, in case of a perfect competition, to 1, in case of a pure monopoly.
It is the oldest measure and is based on the difference between the price charged by the monopolist and his marginal cost. Bober gives the formula 1/E. Thus, degree of monopoly power varies inversely with the elasticity of demand for the commodity.
However, the more commonly used formula is:
Degree of monopoly power = (P-MC) / P
Where P is price charged by the monopolist and MC his marginal cost.
In perfect competition,
P = MC and the formula (P-MC)/P gives zero answer indicating no monopoly power. If the monopolized product is a free good, MC = 0 and the formula registers unity. The index of monopoly power thus varies from zero to unity. Since monopolized goods are seldom free, monopoly power is seldom as high as unity.
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