I’ve been looking into detailed election results, specifically our local school district. There are 31 precincts. To save some time I thought I’d get the GIS maps. Imagine my surprise when I found out they would cost $86 per precinct!
I’m not going to spend that much on maps just to satisfy my curiosity. But I wondered if this came close to the monopoly profit-maximizing price. Have I found monopoly pricing in a government agency?
Review of Econ 1
Before proceeding, let’s quickly review some econ 1. Any profit-maximizing entity will produce the output quantity that makes marginal revenue equal marginal cost (MR = MC). Those entities with market power will set price (p) above both MR and MC. An obvious measure of market power is some measure of price relative to marginal cost. Economists call this measure the Lerner Index (LI = [(p – MC)/p]). A second useful measure is the price elasticity of demand (ε). Because demand curves always slope downward price elasticity of demand is always negative. Monopolies must always choose a price and quantity on the elastic part of a demand curve (because MC can never be negative[1]).
Assumptions and Results
I made two assumptions:
- The agency is maximizing profits so MR = MC.
- Marginal cost is $5.
(If you don’t like assumption 2, feel free to play with the Excel workbook which you can download by clicking here. If you don’t like assumption 1, you’ll have to do the research yourself.)
So here’s the math.
We see first that demand is just barely elastic, putting the price close to the revenue-maximizing price (where demand is unit elastic). And the closer the Lerner Index is to 1.0 the more market power the firm has. I would hazard a guess that this agency is close to monopoly pricing.
[1] Elasticity is -1.0 (unit elastic) exactly halfway up a linear demand curve. At that point p will be half the choke price (the price at which no output will be sold, the vertical intercept of the demand curve). And Q will equal half the maximum quantity (the quantity demanded if the price is zero, half the horizontal intercept).
