Question

A company introduced a new product into the market and is interested to know whether it has some market (monopoly) power. You are assigned to determine whether the company has a market power in the industry. You reviewed the available information about the company and you have learned that the company produces a somewhat unique product that sells for $12 per unit, and the marginal cost is $7.00. Does the company have a market power? Why? Explain to the manager of the company how your findings can be used for making pricing decisions by the company.

Answer 1

Yes, the company indeed has market power, else for a perfect competition or competitive industry, the price will be in such a way that the Marginal revenue or the price will almost be equal to the marginal cost which is not in the case of this firm. With such a market power in play, one has to analyse the change in demand and the profits for the product when the price is increased marginally by $1 each and at a time when the profit is maximum, then the price must be fixed and in this way, the price decisions must be taken accordingly.