Question

Wireless communication is one segment of the communications market. Assume there are two types of wireless callers in this market segment. One type exhibits infrequent demand for wireless calling. The demand curve for these Low Volume consumers is represented by the equation, P = 80 – 2Q. Demand for the second type of consumer, High Volume callers, is P = 120 – Q.1 In both cases, P is cents per minute and Q is the number of minutes per month. The price in this market is $0.20 per minute, regardless of the type of consumer calling.

Assume the merger would allow the newly combined AT&T/Verizon company to enjoy monopoly power. Calculate the profit maximizing number of wireless minutes for each type of consumer, assuming a Marginal Revenue (MR) = 120-1.5Q for high volume and MR = 80-4Q for low volume users. Then, determine the price that the monopolist firm would charge per minute. Calculate the consumer surplus (CS) for each customer in the market. How do these figures compare to the CS before the proposed merger? In your policy brief, connect these findings to the market composition analysis.

Answer 1

A monopolist finds the profit maximizing quantities by setting marginal revenue equal to marginal cost. It then charges a price based on the demand curve for that quantity. Consumer surplus can be compared before and after monopoly pricing to assess the impact of a merger.

Step-by-step explanation:

To maximize profit, a monopolist sets marginal revenue (MR) equal to marginal cost (MC). We do not have the MC here, but we assume the firm will produce where MR equals MC. For High Volume callers with MR = 120 - 1.5Q, and for Low Volume consumers with MR = 80 - 4Q, we would typically solve for Q where each MR equals MC. With the price at $0.20 per minute, this would inform the quantity to supply.

Next, upon determining the profit-maximizing quantity (Q), the monopolistic competitor would set a corresponding price (P) by moving up from Q to meet the demand curve for each type of caller. For example, if MR = MC gave us a Q of 40 for High Volume callers, and their demand is P = 120 - Q, then the price P would be $0.80 (80 cents) after substituting Q into the demand equation.

Consumer surplus (CS) is calculated as the area above the price and below the demand curve before the merger. With monopoly pricing, CS generally decreases as the monopolist raises prices above competitive levels. After finding CS for both caller types, we can compare those to the CS before the merger to analyze the impact.