Original scientific paper

https://doi.org/10.17535/crorr.2017.0024

Monopolist’s mark-up and the elasticity of substitution

Ilko Vrankić ; Department of Economic Theory, Faculty of Economics and Business, University of Zagreb, J. F. Kennedy 6, 10 000 Zagreb, Croatia
Mira Krpan ; Department of Economic Theory, Faculty of Economics and Business, University of Zagreb, J. F. Kennedy 6, 10 000 Zagreb, Croatia
Tomislav Herceg orcid.org/0000-0001-8869-6775 ; Department of Economic Theory, Faculty of Economics and Business, University of Zagreb, J. F. Kennedy 6, 10 000 Zagreb, Croatia

Abstract

This paper analyzes the mark-up of the price of a product over marginal costs for a monopolist using Appelbaum’s theoretical model. The profit maximization model of an industry that uses the monopolist’s product as its input is formulated. Our goal is to express the monopolist’s mark-up as a function of the elasticity of substitution for the respective industry and to analyze how changes in the elasticity of substitution affect the mark-up ratio. Consequently, the CES production function along with its substitution parameter is chosen. An analytical description of changes in the elasticity of substitution and its influence on the monopolist's mark-up is given. All scenarios are supplemented by geometrical illustrations, economic interpretations and numerical examples.

Keywords

profit maximization; monopolist; mark-up; elasticity of substitution

Hrčak ID:

193537

URI

https://hrcak.srce.hr/193537

Publication date:

30.12.2017.

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