Monopolistic Pricing Own-Price Elasticity of Demand apa MR(q=(p(q)q)=p(q)+q DIa p(q)1+ pla dq Own-price elasticity of demand is pla dq DP g dp(a 36
36 Monopolistic Pricing & Own-Price Elasticity of Demand ( ) ( ) ( ) ( ) ( ) ( ) ( ) 1 . ( ) d dp q MR q p q q p q q dq dq q dp q p q p q dq = = + ⎡ ⎤ = + ⎢ ⎥ ⎣ ⎦ Own-price elasticity of demand is , ( ) ( ) D P p q dq e q dp q = −
Monopolistic pricing Own Price Elasticity of Demand SO MR(=p9. 37
37 Monopolistic Pricing & OwnPrice Elasticity of Demand so 1 MR( ) q p( ) q 1 . e ⎡ ⎤ = − ⎢ ⎥ ⎣ ⎦
Monopolistic pricing Own Price Elasticity of Demand MR(q=p(q1 Suppose the monopolist's marginal cost of production is constant, at sk/output unit For a profit-maximum, which is MR(q")=P(q*1-=MC=K
38 Monopolistic Pricing & OwnPrice Elasticity of Demand 1 MR( ) q p( ) q 1 . e ⎡ ⎤ = − ⎢ ⎥ ⎣ ⎦ Suppose the monopolist’s marginal cost of production is constant, at $k/output unit. For a profit-maximum, which is 1 MR q( * ) p ( q * ) 1 MC K e ⎡ ⎤ = − = = ⎢ ⎥ ⎣ ⎦
Monopolistic Pricing own Price Elasticity of Demand MO k p(q*) is the monopolist's price E.g. if e= 3 then p(a*)= 3k/2, and if e=2 then p(a)= 2k The markup rises as the own-price elasticity of demand falls towards 1. 39
39 Monopolistic Pricing & OwnPrice Elasticity of Demand ( * ) . 1 1 1 1 M C k p q e e = = − − is the monopolist’s price. E.g. if e = 3 then p(q*) = 3k/2, and if e = 2 then p(q*) = 2k. The markup rises as the own-price elasticity of demand falls towards 1
Markup Pricing: Summary Markup Pricing MC P e a Pricing for any firm with monopoly power If Ed is large, markup is small If Ed is small, markup is large
40 Markup Pricing ：Summary Markup Pricing Pricing for any firm with monopoly power If Ed is large, markup is small If Ed is small, markup is large 1 1( ) d M C P e = −