Prof Landsburg: People’s preferences change. Does it matter if the reason Snidely is raising the price of bagels is because his opportunity costs for bagels increased (say, because he found he had a greater hankering for bagels than in the past)?

Of course, you could argue that he could do the same thing in the grocery market—offering a single standard sized package of groceries and extracting all his surplus there instead of in housing. But by posing the question as a choice between setting a high or a low grocery price, the problem implicitly rules out this kind of bundling.

In summary: It’s got to be optimal for Snidely to offer either a single standard-sized grocery package or a single standard-sized home; either way he gets all the surplus. . The wording of the problem seems to rule out the former, which leaves us with the latter.

But in pretty much *any* model, the point is this: Snidely has to give the residents some total amount of surplus; otherwise they’ll leave town. That means he gets to keep all of the social surplus, minus the constant amount he’s got to give the residents. To maximize (total surplus minus a constant) it is necessary and sufficient to maximize total surplus. Monopoly pricing fails to maximize total surplus, so it can’t be the right strategy.

In this model, the inhabitants are apparently completely indifferent to quality or additional space. Not only has Snidely managed to impose a monopoly price, but he has been able to do this without limiting consumption or total social value. However, we can’t say that he is holding the price above the competitive market price, since this model is so strange that there is no price which could be described as the competitive market price. All of these make the model seem weird to me, but I’ll concede that if you take this model, it has the behaviour you describe.

Are you confusing fixed supply with fixed demand?

Just to be clear, this isn’t technically a “double monopoly” situation, is it? Snidely doesn’t technically have a monopoly on housing, since people can live in other towns, but once people choose to live in his town, he then has a monopoly on groceries. So it’s analogous to the movie theater / popcorn situation. Is there a technical term for that, like a “consequential monopoly”?

Or in terms of tollbooths, it’s as if there are multiple bridges competing for drivers’ business to get across the same river — once a driver chooses a bridge, the bridge owner could put another tollbooth at the other end of the bridge and they’d have a “monopoly” on getting off their bridge, but they wouldn’t make any more than if they charged the same total at the first tollbooth.