Question

Cenario:

Aristotle Murphy owns movie theatres in two towns of roughly the same size, 100 kilometers apart. In Monopolia, he owns the only chain of theatres (he is a monopolist). In Competitia, there is no theatre chain and he is only one of a number of independent theatre operators.

note

In Monopolia Mr. Murphy will be a price maker (since he is a monopolist there), but in Competitia he is a more of a price taker (since he is facing monopolistic competition). Therefore one can expect his price to be lower in Competitia in both the short and long runs. He is also practicing price discrimination because he is charging two different prices for the same product because he is able to separate his customers into two different markets due to the distance between the towns.

THE Question is:

Aristotle is adamant that he does NOT want to lower his prices in Monopolia in the long run, even when new competitors appear on the scene. If you are his business consultant, how can you help him do this? What specific tactics and rationale would you advise?

Answer 1