Question

a) Identify the most important source(s) of market power in the following markets and briefly explain your answers:

i. Small town bars with liquor licenses

ii. Apple iPad

iii. Electronic commerce (Amazon)

iv. Brand-name prescription drugs

v. Netflix

b) Calculate the Lerner Index for the following profit maximizing firms:

i. Netflix: price = 10, marginal cost = 4

ii. Shell gasoline: elasticity = 0.6

c) Provide an example cross price elasticity for the following products and briefly justify your answer:

i. The price of Apple iPhone X and the quantity of Samsung Galaxy S10

ii. The price of BP gasoline and the quantity of Ford Expedition SUV’s

iii. The price of Starbuck’s latte’s and the quantity of Nike shoes

Answer 1

Answer to the first question is provided below :

a) i. Small town bars with liquor licenses : There is monopolistic competition in this market . Few shops get the license and hence there are few sellers with many buyers . They sell slightly differentiated combination of liquor or sometimes even identical .

ii. Apple iPad : Here the market power is from brand recognition . It has very few close substitutes which makes it enjoy almost monopoly powers in the market .

iii. Electronic commerce (Amazon) : Very few substitutes or other merchant in the market . So there is monopolistic competition in the market .

iv. Brand-name prescription drugs : Patented or having a particular secret medicine composition , these drugs are monopoly markets where we find no close and exact substitutes . Patenting of prescription drugs allow them to enjoy monopoly powers because they become single producers .

v. Netflix : Netflix can be considered a monopoly because it produces more and better content than its competitors like Amazon prime , Hulu etc . Netflix is an American media service provider .