What is the Lerner index

The Lerner index is another way of measuring concentration. It is a theoretically founded index that tells us the degree of market power as it tells us how much the actual price is higher than marginal cost. The difference between P and MC is called the mark-up: P - MC. The Lerner index provide a key relationship: The higher the price elasticity of demand in a market, the lower is the mark-up in that market and therefore the lower the Lerner index. Hence, if L = 0 then we are at perfect competition P = MC (Low centration/high competition). But if L has a large value that indicates a large mark-up and hence indicates high concentration (i.e., low competition).