Question

Durable Goods Q3. Read the very short Wikipedia description about the famous antitrust decision in the 1940s in- volved Alcoa here: https://en.wikipedia.org/wiki/United-States-v.-Alcoa, which mentions one of the controversial parts of the case. Alcoa argued that while it was close to a monopolist in the production of new aluminum it lacked market power because of the existence of a market for scrap aluminum, which it could not directly control. Judge Learned Hand ruled that Alcoa's production of new alu- minum meant that it could actually extract as much profit as if it did control the secondary market. In this question we try to consider whether this is good logic Suppose that there are two periods and in the following question Alcoa is a monopolist maker of new aluminum with marginal costs of making aluminum of zero. (a) Suppose that it is not possible to recycle/resell aluminum (e.g., it isn't durable) Demand in 100 P and demand in period 2 is Q2 120 period 1 is Q1 P2. Show that Alcoa will set a price of 50 in period 1. What price does it set in period 2? What are Alcoa's total profits? (b) Now suppose that some one who buys in period 1 can resell the aluminum at zero cost in period 2 (to make it easier to think about, just assume that people demand aluminum in period 1 or period 2, but not both). The demand to use as above aluminum in each period is the same S In this model the inverse demand in period 2 is P= 120 - Q1 - Q2, where the Qs are now intepreted as the amount of new aluminum that Alcoa produces in each period. (i) Explain why demand in period 1 will be Q1 = 100- P1P2 (where assuming that people we are in period 1 will know what the period 2 price will be) Assuming that Alcoa can commit to the amount in produces in each period at the beginning of period 1, show that the first period price will be 110 and that the second period output will be 10. (iii) What Alcoa's total profits now? How do they compare to (a)? Is this consistent with are Judge Hand's view?

Answer 1

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