Question

[Successive monopolies, monopoly extension with fixed proportions: 52 pts] Suppose an upstream monopoly firm produces chips that are used by a downstream industry to make a special kind of electronic device. The upstream firm has constant marginal cost (equal to average cost) of MCC= $20. Each electronic device requires exactly one chip (fixed proportions). Therefore the downstream industry has constant marginal cost (equal to average cost) of $10 plus the price of chips, PC, which set by the upstream monopolist. Also suppose demand for devices is a straight line. Thus the key assumptions are:

Marginal cost of chips: MCC = $20.

Marginal cost of electronic device: MCD = $10 + PC

Demand for electronic device: PD = 70 – (Q/100).

a. Find the equation for the marginal revenue curves for electronic devices. [Hint: For linear demand curves, marginal revenue has the same vertical intercept, but twice the slope, as the demand curve.] MRD =

We now compare market outcomes under three scenarios:

(i) upstream and downstream markets are both monopolized, (ii) upstream and downstream are served by a vertically-integrated monopoly, and (iii) the upstream market is monopolized but the down stream market is competitive.

(i) First suppose both upstream and downstream markets are both monopolized. This is the scenario of "successive monopolies" causing "double marginalization."

b. Find the equation for the derived demand curve for chips. [Hint: Set the marginal cost of the electronic device equal to MRD and solve for PC.] PC =

c. Find the equation for the marginal revenue curves for chips. [Hint: For linear demand curves, marginal revenue has the same vertical intercept, but twice the slope, as the demand curve.] MRC =

Answer 1