A monopoly firm fears that a potential rival firm will invent a new, similar product and...

A monopoly firm fears that a potential rival firm will invent a new, similar product and enter the monopoly’s market. Therefore, both firms have an incentive to invent the new product. It is in the monopoly’s interest to make sure that it is the first to invent to maintain its monopoly power.

Explain how can the monopoly guarantee it is the first to invent.

[4 Marks]

Patents were rated the least effective mechanisms of appropriating the returns from a competitive advantage for new processes. What are the other mechanisms that are better means of protecting the comparative advantage for firms?

Solutions

Expert Solution

1. A monopoly can emphasis that it will be the first firm to invent if it can have economies of scale. When comparing with the demand for the product if it has the capability to generate huge economies of scale then the firm can assure that it is the first to invent.

Another means to guarantee the investment is to have the power and control to regulate and use the resources necessary for the firm to function.

2. Other than patents there are some other measures for protecting the monopoly of the firm. This includes a strategic price mechanism and creation of a prominent and powerful brand name.

By regulating the price of the product a firm can continuously earn the comparative advantage. This can be done by fixing the price of the product very low when a new firm enter the market. This will discourage the new firm from conducting the business and it will exit the market. Thus the already existing firm earns profit and they can change the pattern of pricing later on.

Another way of protecting the comparative advantage is by creating a strong brand name and canvasing large customer base. If the customers are loyal they will stick on to the same brand.

Rahul Sunny answered 2 years ago

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