Question

Suppose the demand for paper (dead-tree) books is more elastic than the demand for the Kindle version
of the same book. If the cost of producing both versions is the same, would the Kindle price to be
higher or lower than the paper version? Explain, with the aid of a diagram.

Answer 1

The figure above gives the market for kindle book and paper book. Assuming the book is unique and has publishing right reserved to the publisher, this is a monopoly market. The monopolist maximizes their output by choosing an output for which marginal revenue equals the marginal cost. As the cost of producing both goods is the same, assume the production has the same constant marginal cost of production.

As the paper book has an elastic demand, the demand curve for the paper books is flatter than the kindle book. In the figure above the demand curve for paper-book is flatter than kindle book. As the marginal revenue has twice the slope of the demand curve, the MR curve of both books is given as MRpb and MRkb. The equilibrium in the paper book market occurs at Epb. The price of the paper book is thus Ppb. Similarly, that of kindle book price is Pkb. From figure Pkb>Ppb.

This is because, as the paper book has higher elasticity, the marginal revenue cuts the marginal cost at a higher output than the kindle book. Thus, the price of the paper books is lower than that of the kindle book.