Chapter 19 — Exercises
Section A — Monopoly pricing
A1. A monopolist faces demand P = 200 − 2Q and has MC = 20 + 2Q. Find: (a) the MR curve, (b) the profit-maximizing quantity, (c) the monopoly price, (d) the competitive quantity (where P = MC), (e) the deadweight loss.
A2. A monopolist faces demand P = 100 − Q and has constant MC = $20. Find the monopoly quantity, price, and profit. Draw the diagram.
A3. Why is MR < P for a monopolist but MR = P for a competitive firm? Explain intuitively.
A4. A monopolist can sell 10 units at $50 each or 11 units at $48 each. What is the marginal revenue of the 11th unit? (Hint: it's not $48.)
A5. If a monopolist's MC shifts upward (say, input prices rise), what happens to the monopoly quantity, price, and profit?
Section B — Sources of monopoly power
B1. For each of the following, identify which source of monopoly power is at work: - (a) A pharmaceutical company with a patent on a cancer drug - (b) The only water utility serving a small town - (c) Facebook/Instagram/WhatsApp's dominance in social media - (d) De Beers' historical control of diamond mines - (e) Google's dominance of search
B2. "Patents are necessary evils — they create monopoly power (bad) to incentivize innovation (good)." Evaluate this tradeoff. How long should a patent last?
B3. Why is it hard for a competitor to challenge Google's search dominance? Apply the network-effects framework.
B4. Natural monopolies can't be fixed by encouraging competition. Why not? What should be done instead?
Section C — Price discrimination
C1. A movie theater charges $12 for adults, $8 for students, and $6 for seniors. What degree of price discrimination is this? Why does it work? What prevents adults from claiming to be students?
C2. Airlines charge very different prices for the same seat depending on when you book. Is this first-, second-, or third-degree discrimination? Explain.
C3. A software company offers three tiers: Basic ($10/month), Pro ($25/month), and Enterprise ($100/month). What degree is this? How does the menu induce self-selection?
C4. First-degree price discrimination eliminates deadweight loss but transfers all surplus to the producer. Is this better or worse than single-price monopoly from a welfare perspective?
C5. "Price discrimination is unfair because people pay different prices for the same thing." Evaluate. Under what conditions is price discrimination welfare-improving?
Section D — The tech monopoly debate
D1. Apply the four sources of monopoly power to Google. Which sources are most relevant?
D2. "Google Search is free, so there's no consumer harm." Evaluate using both the consumer-welfare standard and a broader standard that includes data privacy and platform power.
D3. Should the government break up Amazon (separate the marketplace from Amazon-branded products)? Apply the monopoly framework. What are the benefits? What are the costs?
D4. Apple charges a 30% commission on all App Store purchases. Is this monopoly pricing? What alternatives exist for app developers?
D5. "Breaking up Big Tech would hurt innovation." Evaluate. What is the relationship between firm size, market power, and innovation?
Section E — Antitrust
E1. The Sherman Act (1890) was used to break up Standard Oil. Apply the monopoly framework: what was Standard Oil's source of market power? What was the deadweight loss? Was the breakup a good idea?
E2. The consumer-welfare standard says monopoly is harmful only if it raises prices. Why might this standard be too narrow for evaluating Big Tech?
E3. Compare structural remedies (breakups) to behavioral remedies (changing practices). When is each appropriate?
E4. The EU has been more aggressive than the U.S. in regulating Big Tech. Why? What are the differences in legal philosophy?
Section F — Data lookup
F1. Look up Google's market share in search (globally and in the U.S.). Has it changed in the last 10 years?
F2. Look up Amazon's share of U.S. e-commerce. How does it compare to Amazon's share of total retail?
F3. Look up the U.S. DOJ's 2020 antitrust case against Google. What was the allegation? What was the outcome?
Section G — Reflection
- Before this chapter, did you think of Google, Amazon, or Apple as monopolies? Has your view changed?
- The consumer-welfare standard has dominated antitrust for 40 years. Do you think it should be replaced with a broader standard?
- Price discrimination is everywhere (student discounts, airline pricing, software tiers). Do you think it's fair?
Selected answers in appendices/answers-to-selected.md.