Transcription of Module 1: Pricing Behavior - kellogg.northwestern.edu
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Module 1: Pricing Behavior - kellogg.northwestern.edu
Module 1: Pricing BehaviorMarket Organization & Public Policy (Ec 731) George GeorgiadisMonopoly Pricing Consider a monopolist facing demand curveD(p), whereD0(p)<0. , if the price isp, then demand for the good will be equal toq=D(p). WriteP(q) to denote the inverse demand function; ,p=D 1(q). The cost of producingqunits of the good isc(q), wherec0(q)>0. The monopolist wants to choose the price to maximize his profit. So he solves:maxp{pD(p) c(D(p))} First order condition:D(p)+pD0(p)|{z}marginal revenue=c0(D(p))D0(p)|{z}marginal cost=)p c0(D(p)) = D(p)D0(p)=)p c0(D(p))p=1 (1)where = pD0(p)D(p)denotes the demand elasticity at pricep.
Module 1: Pricing Behavior Market Organization & Public Policy (Ec 731) · George Georgiadis Monopoly Pricing Consider a monopolist facing demand curve D(p), where D0(p) < 0. – i.e., if the price is p, then demand for the good will be equal to q = D(p).
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