A patent gave Sony a legal monopoly to produce a robot dog called Aibo (“ eye- BO”). The Chihuahua- size pooch robot can sit, beg, chase balls, dance, and play an electronic tune. When Sony started selling the toy, it announced that it would sell 3,000 Aibo robots in Japan for about $ 2,000 each and a limited litter of 2,000 in the United States for $ 2,500 each. Suppose that Sony’s marginal cost of producing Aibo robots was $ 500. Its inverse demand function was pJ = 3,500 - 12 QJ in Japan and pA = 4,500 – QA in the United States. Solve for the equilibrium prices and quantities (assuming that U.S. customers cannot buy robots from Japan). Show how the profit-maximizing price ratio depends on the elasticities of demand in the two countries. What were the deadweight losses in each country, and in which was the loss from monopoly pricing greater?

  • CreatedNovember 13, 2014
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