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MENTAL MODEL · M5798

Lerner Index

Lerner Index
BusinessHigh supportEconomics
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Version 1.0.0 · Updated 2026-07-30

CORE DEFINITION

An indicator measuring a firm's monopoly power. $L = (P - MC) / P$. The more price (P) exceeds marginal cost (MC), the higher the index and the stronger the monopoly power. Under perfect competition, L=0.

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Quantification of pricing power. Buffett's "moat" is mathematically the Lerner index. If you can raise prices without worrying about a sharp drop in sales, your Lerner index is high. This is a core indicator in investment analysis.

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The Lerner index L = (P − MC)/P quantifies a firm's market power: it equals the markup as a proportion of price. L=0 indicates perfect competition (no pricing power), while L approaching 1 indicates strong monopoly (can raise prices significantly without losing sales). It is the mathematical expression of "moat/pricing power" — if you can raise prices without sales collapsing, you have a high L.

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Source support: Explicit

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    en.wikipedia.orghttps://en.wikipedia.org/wiki/Lerner_indexZH · Explicit
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