Monopolist’s mark-up and the elasticity of substitution

  • Ilko Vrankić University of Zagreb, Faculty of Economics and Business
  • Mira Krpan University of Zagreb, Faculty of Economics and Business
  • Tomislav Herceg University of Zagreb, Faculty of Economics and Business

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. 

Author Biographies

Ilko Vrankić, University of Zagreb, Faculty of Economics and Business
Department of Economic Theory, Associate Professor
Mira Krpan, University of Zagreb, Faculty of Economics and Business
Department of Economic Theory, Assistant Professor
Tomislav Herceg, University of Zagreb, Faculty of Economics and Business
Department of Economic Theory, Assistant Professor
Published
2017-12-06
Section
CRORR Journal Regular Issue