Question

1. There are 4 firms in an industry, each with 25% market share. Firm X has a price elasticity of demand EX = -10. The supply elasticity of the other 3 firms is SO = +2. What is the market demand elasticity for this industry? In terms of markup, how much market power does Firm X have?

Answer 1

As all firms have equal market share we can calculate the weighted average elasticity of all the firms in the industry. Thus in this case we have the weighed elasticity as 1/4*(-10) + 3/4*(2)= -10/4 +6/4=-1. Thus the industry elasticity of demand is unity. For the mark up power we use the Lerners price index. Thus we have P-MC/P = 1/e where e is the elasticity of demand. Thus for firm X the market power is 10% as per the Lerner index and given the Firm X elasticity of -10.