Question

QuadPlex Cinema is the only movie theater in Idaho Falls. The nearest rival movie theater, the Cedar Bluff Twin, is 35 miles away in Pocatello. Thus QuadPlex Cinema possesses a degree of market power. Despite having market power, QuadPlex Cinema is currently suffering losses. In a conversation with the owners of QuadPlex, the manager of the movie theater made the following suggestions: “Since QuadPlex is a local monopoly, we should just increase ticket prices until we make enough profit.”

a. Comment on this strategy. Will it work in short run?

b. Is the Lerner index an appropriate measure for the market power of QuadPlex Cinema? Please explain your answer briefly.

c. What options should QuadPlex consider in the long run?

Answer 1

Monopolies are usually inefficient and carry dead weight loss it’s to do with demand and supply raising prices will lower demand and may even be negative for the company to do so especially if they are running losses at the moment.

A monopolist, although the only supplier in the market, still faces the constraint of the market demand. Suppose that a monopolist is suffering losses even though is changing the price associated with the level output at which MR = SMC. If the QuadPlex raises price, even larger losses will be incurred. A monopoly market structure is no guarantee that a cinema can earn economic profits.

Answer b :

Market power has its limits. In this case, we can't increase uncertainly the cost of the ticket or the great, because the consumer's breakeven point will become possibly the most important factor and he/she will switch the use of the ticket to some other usage



Answer c :

This QuadPlex Cinema could add other usage to its existence, such as movies and conference, avenues, entertainment world, usage of the recent technology. It has its physical area unblemished however should change its advertising to new or more up to date usage of its physical condition.