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QuadPlex Cinema is the only movie theater in Idaho Falls
QuadPlex Cinema is the only movie theater in Idaho Falls. The nearest rival movie theater, the Cedar Bluff Twin, is 35 miles away in Pocatello. Thus QuadPlex Cinema possesses a degree of market power. Despite having market power, QuadPlex Cinema is currently suffering losses. In a conversation with the owners of QuadPlex, the manager of the movie theater made the following suggestions: Since QuadPlex is a local monopoly, we should just increase ticket prices until we make enough profit.
a. Comment on this strategy. Will it work in short-run?
b. Is the Lerner index an appropriate measure for the market power of the QuadPlex Cinema? Explain briefly.
c. What options should QuadPlex consider in the long run?
Expert Solution
a. The cinema is trying to get the best out of whatever demand it is being able to create among the people for the tickets. This strategy of charging more from the few customers to keep earning and staying in business may help them in the short run, as immediately people who do watch the movies in this particular cinema will not have a choice and will continue purchasing at the same price.
b. Measuring the elasticity in this case would be a more apt decision than using the Lerner's index as the latter also functions on elasticity and it once the former is defined the degree to which the power exists in the market of cinema can be clearly defined.
c. The cinema is expected to employ a more diverse strategy to derive benefits in such peculiar circumstances. Following some sort of price discrimination might help more than just increasing the ticket price, especially in the long run.
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