A monopoly produces a good with a network externality at a constant marginal and average cost of 2. In the first period, its inverse demand function is p = 10 – Q. In the second period, its demand is p = 10 – Q unless it sells at least Q = 8 units in the first period. If it meets or exceeds this target, then the demand curve rotates out by a (it sells a times as many units for any given price), so that its inverse demand curve is p = 10 – Q / α. The monopoly knows that it can sell no output after the second period. The monopoly’s objective is to maximize the sum of its profits over the two periods. In the first period, should the monopoly set the output that maximizes its profit in that period? How does your answer depend on α?

  • CreatedNovember 13, 2014
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