Pricing behavior The lerner index -(P-MC)/P A measure of the difference between price and marginal cost An index from o to 1 Markup Factor Rearranging the above formula P=(1/(1-L)MC 1/(1-L)is the markup factor Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Pricing Behavior • The Lerner Index L = (P - MC) / P n A measure of the difference between price and marginal cost. n An index from 0 to 1. • Markup Factor n Rearranging the above formula, P = (1/(1-L)) MC n 1/(1-L) is the markup factor