Week 5 — Monopoly and market power
How big is my markup, what does it say about my customers, and what protects it?
This week you will
- Find a single-price seller’s best price from a demand line and its marginal cost.
- Read your own company’s markup off its gross margin, and turn it into an elasticity.
- Name what protects that markup from rivals — and what could take it away.
1. Watch
Work through the three concept pages in this order. Each page has a short video at the bottom.
| # | Concept page | Textbook |
|---|---|---|
| 1 | Monopoly pricing: MR = MC | P&B 9.1, 9.3 (9.3: intuition only, skip the welfare-triangle arithmetic) |
| 2 | Markup and elasticity: the Lerner index | P&B 9.2 |
| 3 | Sources of market power | P&B 9.4, 9.6 (skip 9.5) |
2. Try
On each concept page, do the “Try it” box. Then try this company version: read your margin, name your walls.
- Open your company’s latest 10-K, Item 8. Find revenue and cost of revenue. (A software company might keep 70 cents of each dollar after cost of revenue; a grocery chain closer to 25.)
- Open the Lerner calculator on the markup and elasticity page and press Use my numbers. The margin becomes your Lerner index, the Lerner index becomes an elasticity, and the tool lines it up against the elasticity you estimated in Week 1 from two price points. If the two disagree, say why in one sentence.
- Go to the Mark my price panel on the monopoly pricing page. Put your price and your cost on one picture, and export it.
- Ask what keeps rivals from competing that markup away. A subscription business might point to switching costs and a large user base; a drug maker to patents with years left; a utility to its franchise. Rank the top two walls with one fact each. Then find one risk-factor paragraph or news item that could knock a wall down.
Those four steps are Playbook P5.
Class experiment
Anonymous and not graded. The whole class answers one short question; the results appear when it closes.
3. Check yourself
Answer the “Check yourself” questions at the end of each concept page. They are not graded. They tell you if you are ready for the homework.
4. Do in Moodle
- Practice Homework U5 — concept questions, plus Excel Lab items with
Lab_U5.xlsx. - Playbook Page P5 Market Power.
- Two peer comments.
- The anonymous mid-course survey (4 questions, about 5 minutes).
This week’s formulas
- Demand P = a − b·Q → MR = a − 2b·Q · best plan: MR = MC, then the price comes off the demand line
- Profit = (P − MC) × Q − F · fixed cost changes profit, not the plan
- Lerner = (P − MC) ÷ P ≈ gross margin = (revenue − cost of revenue) ÷ revenue
- At the best price: Lerner = 1 ÷ |ε| · P = MC ÷ (1 − 1 ÷ |ε|) · always in the elastic range (|ε| > 1)
Due dates and points are in Moodle.