Essay on Thumb Rule of Pricing

732 Words Feb 2nd, 2013 3 Pages
10.1

MONOPOLY

A Rule of Thumb for Pricing
Chapter 10: Market Power: Monopoly and Monopsony

We want to translate the condition that marginal revenue should equal marginal cost into a rule of thumb that can be more easily applied in practice. To do this, we first write the expression for marginal revenue:

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e.

9 of 50

10.1

MONOPOLY

A Rule of Thumb for Pricing
Chapter 10: Market Power: Monopoly and Monopsony

Note that the extra revenue from an incremental unit of quantity, ∆(PQ)/∆Q, has two components: 1. Producing one extra unit and selling it at price P brings in revenue (1)(P) = P. 2. But because the firm
…show more content…
Prilosec was based on a very different biochemical mechanism and was much more effective than earlier drugs. By 1996, it had become the best-selling drug in the world and faced no major competitor. Astra-Merck was pricing Prilosec at about $3.50 per daily dose. The marginal cost of producing and packaging Prilosec is only about 30 to 40 cents per daily dose. The price elasticity of demand, ED, should be in the range of roughly −1.0 to −1.2. Setting the price at a markup exceeding 400 percent over marginal cost is consistent with our rule of thumb for pricing.
13 of 50

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e.

10.2

MONOPOLY POWER

The Rule of Thumb for Pricing
Chapter 10: Market Power: Monopoly and Monopsony

Figure 10.8 Elasticity of Demand and Price Markup

The markup (P − MC)/P is equal to minus the inverse of the elasticity of demand facing the firm. If the firm’s demand is elastic, as in (a), the markup is small and the firm has little monopoly power. The opposite is true if demand is relatively inelastic, as in (b).
28 of 50

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e.

10.2

MONOPOLY POWER

Chapter 10: Market Power: Monopoly and Monopsony

Although the elasticity of market

Related Documents