Creating monopoly power

The standard analysis of monopoly assumes that the seller has price-setting power. Without this assumption, it is not clear what monopoly power is or whether it exists. To address this question, this paper uses the core of a TU game in place of price-setting. The core provides a model of competition in which outcomes can be interpreted as the consequences of free-form bargaining or negotiations. This paper shows that if a core analysis is embedded in a capacity choice context, monopoly power can be created with credible undersupply. But in monopoly, a core analysis also shows that competition only partially determines the outcomes. Using a biform game analysis, this paper shows that the monopolist's view of this indeterminacy directly affects its capacity choice. A moderate view of the indeterminacy generates outcomes that are more socially beneficial than setting a uniform price. The two extreme views of the indeterminacy are shown to generate results consistent with uniform pricing and perfect price-discrimination. (C) 2007 Elsevier B.V. All rights reserved.