Question

In a specific industry with a single firm acting as a monopolist, it is noted the per-unit price is closer to the perfectly competitive equilibrium than the per-unit price expected if the firm was strictly profit-maximizing. No additional information is available concerning the firm (advertising expenses, initiation fees, etc.). Which of the following statements is true?

• The firm might be limit pricing or entry pricing. If the firm is entry pricing, we might expect to see prices rise once it has “enough” customers. If the firm is limit pricing, we would expect to see prices remain the same.

• The firm might be network pricing. In order for this to be effective, customers must gain additional value from the product as more customers use it.

• The firm might own another product that customers view as a substitute, making it more profitable to decrease the price of both goods.

a. The first statement only

b. The first and second statements only

c. The first and third statements only

d. All of the statements are true

e. None of the statements are true

[Note: the “only” stipulation should be taken literally. For example, in option a., this means the first bullet is true but the second and third are false.]

Answer 1

Based on the above statements only 1st and 3rd statement are applicable in a monopolistic setup.

Statement 1: There may be selection of entry pricing or limit pricing. Entry pricing ensures profits in later stage of the business while limit pricing keep the profit consideration since the begining and even optimize it.

Statement 2: It is not necessary for a firm to look for a value based profit system out of their network strategy.

Statement 3: Monopolies generally go for multiple sets of products to create a choice based model for their customer. it inhances the chance of positive response from the customer and keeps a check on adverse situations.

So, option (c) is correct.