Summary 347S2. Suppose a monopolist controls the industry described in Problem S2 of
Chapter 7. The industry demand curve remains P 160 2Q. In
addition, total production costs are unchanged: C 800 40Q .5Q^2.
Create the requisite spreadsheet and use the spreadsheet’s optimizer to
determine the monopolist’s profit-maximizing output.Suggested References
Carlton, D. W., and J. M. Perloff. Modern Industrial Organization.Chapters 4, 5, and 7. Reading,
MA: Addison-Wesley, 2004.
Joskow, P. L. “Restructuring, Competition, and Regulatory Reform in the U.S. Electricity Sector.”
Journal of Economic Perspectives(Summer 1997): 119–138.
Joskow notes that natural monopoly elements are more important in electricity transmission than in generation
and discusses opportunities for competition and deregulation.
Levenstein, M. C. “What Determines Cartel Success?” Journal of Economic Literature(March 2006):
43–95.
Tirole, J. The Theory of Industrial Organization.Chapter 1. Cambridge, MA: MIT Press, 1989.
Tirole’s opening chapters provide a theoretical overview of pure monopoly.
OPEC’s official Web site iswww.opec.org.- Note that the Lerner index is just the monopolist’s optimal markup.
According to the markup rule in Chapter 3, (P MC)/P 1/Ep. In
short, if the monopolist is profit maximizing, the Lerner index should be
equal to the inverse of the industry’s price elasticity of demand. This
index indicates the degree to which the monopolist can elevate price
above marginal cost. However, it does not measure the magnitude of
monopoly profit (since no account is made for the firm’s total quantity of
output or its fixed costs). - Intel’s entry barriers stemmed from (1) pure quality and cost advantages
(Intel’s chips were cheaper and faster than anyone else’s), (2) patents
(which the company vigorously defended), (3) product differentiation
(the Intel Inside campaign), and possibly (4) economies of scale. Besides
items (2) and (3), Intel impeded entry by cutting prices on its chips and
expanding factory capacity for producing chips. Indeed, when Intel
announced the development of its Pentium chip, it exaggerated its
features, thereby deterring its major customers (computer
manufacturers) from experimenting with rival chips. - In a competitive market, the increase in demand would generate an
equal long-run increase in supply. There is no increase in price. Under
monopoly, the demand shift causes a rightward shift in the MR curve. As
a result, the monopolist increases output as well as price. What if there is
a cost increase instead? In the competitive market, price increases dollar
CHECK STATION
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