Question

1. Identify a monopoly industry

(a) Look around you at industries/product that you see in the marketplace and identify at least one that you think is a monopoly. (Do NOT use a public utility or other natural monopoly) Do you think that, as suggested in the book, prices are higher and output lower with a monopolist than with a highly competitive firm?

(b) Can you think of instances in which a monopoly has been exposed or opened up to more competition and prices have gone down and quantity of output gone up as a result? Be specific in your answer.

(c) Consider a specific product in the garment industry. How close is it to a monopoly for specific items, maybe in specific cities or neighborhoods?

2. Monopolistic Competition

Think of a monopolisticly competitive industry that you think you could actually get into, possibly in a specific area of the garment industry. What qualities would make it that kind of an industry? Do you think, that if you were successful, that other competitors would jump in to compete away your profits? How could you try and maintain your profits? Are there monopolistic competition businesses that you are familiar with in your own experience that remain more than 'normally' profitable?

3. Basking Robin's Ice Cream

Are the profits made by Baskin Robbins Ice Cream Company really an economic profit or are they an implicit cost -- a royalty due to Mr. Robbins for creating 31 flavors?

Asked differently, how do economists explain how/why firms in monopolistic competition break even?

Answer 1

1. Identification of a monopoly industry

a) The closest thing to a private monopoly in the U.S is Luxottica. They are involved in the production of over 80% of the worlds major eye ware brands; they own several major companies such as Ray-Ban and Oakley, they also own many of the retailers such as Sunglass Hut and Target Optical, they are under licence to make glasses for high fashion companies such as Chanel and DKNY, they also own the second largest eye insurance cover provider.

As suggested in book, in general, for monopolistic industry, the prices are higher and output is lower.

b) Take an example of Electricity Company as utility provider. When only single company is available for electric generation and distribution, prices tend to be on higher side. If couple of other utility companies are ready to supply electricity in the area, overall electricity for the area normally comes down due to competition, at the same time production, supply and efficiency of each company increases, in order to withstand competition and provide better service to consumers.

c) Specific branded garment products e.g. Adidas, Nike have monopoly in their own branded business and these goods have demand worldwide. If we think about specific cities / communities, there might be demand for specific products according to community habits for wearing of cloths.

2. Monopolistic Competition

For monopolistic competition in garments industry, we can take specific example of innerwear industry which can come under monopolistic competition. Brands such as Jockey, Adore Me, Bali, Formfit, Fruit of the Loom, Kayser-Roth, Maidenform etc compete with each other. Innerwear industry is one of the necessities of human being and there is perinial demand for the product. In general, lot of new competitors emerge into this space, as the margin in this business is better compared to other textile business. In order to maintain the existing business and margins, companies try to be competitive in production techniques, become innovative etc to maintain their profits. Well established dinnerware businesses thus remain "Normally" profitable.

3. Basking Robin's Ice Cream

Baskin Robin makes business in more than 110 countries in the world. They are increasing thier business by retailing and franchising model. They are moving out of costly process of ice-cream manufacturing and instead outsourcing the production to third party suppliers. This makes cost effective product where margins can be maintained and at the same time, revenue keeps on increasing by franchising and retailing. Each franchise pay royalty to original company for the brand and taste they offer. Thus, although they make economic profit, part of the same goes as implicit cost as royalty to owners, who created 31 brands.