engleski

Monopolist’s mark-up and the elasticity of substitution

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.

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

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