Question

Subject: Pricing with Market Power

Required: You should identify an example of a firm that sets prices with market power using the concepts covered in the chapter (price discrimination, non-linear pricing). This post should include some background information about the market and/or the time period covered. You should also give an explanation about the pricing strategy. Write 300 words and write the link which you will be using for this writing.

Please write in your own words and write appropriate answers. Thank You!

Answer 1

Let us take an example of Apple Company. The main goal of the managers of Apple company or any company in the world is to maximize its profit by minimizing the cost or increasing the revenue.

We know that Profit = Revenue - Cost

Profit can be maximized when the marginal cost of the firm is equal to its marginal cost. The company like Apple set its price by marking up their marginal cost while listing them for sale. We have seen how they increase their price whenever they launch a new iPhone. Since the demand for the latest iPhone X is inelastic, the Apple company gain a lot of market power and this leads to set a higher market price. And when the markup is 1 and the demand is perfectly elastic like in the case of old iPhone 5S or iPhone 6, the company set its price equal to the marginal cost. They way they get more sales and earn more profit from older iPhone variants as well. This also follows the same concept of setting the price in their other product segment as well. Even though they set their prices high in comparison to their competitors but still get enough sales like the older days. In fact, people love to wait for the latest variant of iPhone and willingly spend a huge amount of money in order to get the latest iPhone.