Course:  Antitrust Law

Republished with permission of Ruben Bolling

This simulation illustrates how a monopolist can cause harm to consumers and create market inefficiency by withholding socially valuable output and raising prices.   For simplicity, we make the following assumptions:

1. The marginal cost of production is constant, and the monopolist knows this cost.
2. The monopolist has perfect information about the market demand at each price.
3. The monopolist may not discriminate among buyers, but must offer the same price to all.

In this simulation, you are a firm that manufactures a product at a cost of $2 per unit (including normal profit), and faces the demand curve Q=120-15p, as shown in the graph below.

You are to determine the quantity of your output and the price at which you will offer the product.  When you click the button, the consequences of your choice will appear.  Two cases are presented.  In the first case, you are facing perfect competition, so consumers will be able to turn elsewhere if you raise your price above the competitive level.  In the second case, you are a monopolist, so you will be able to choose any combination of quantity and price.  You will sell all of your output provided that you set your price at or below the market clearing price.  (This can be done automatically for you, if you so choose).

Try different values until you are satisfied that you have maximized your profit in each case.  What are the effects of your decisions on consumers?

Copyright © 2001 Andrew Chin.  All rights reserved.  Republication of all or part of this document, including the software elements thereof, in any form, including electronic, without written consent of the author is prohibited.