Question

In the company Western Union What market structure does this firm operate in? Why? Analyze the characteristics of this market. What does economic theory tell you about the role of advertising in this market? Do you observe this in the data? Why or why not? What can you say about economic profits for this firm in the short run as well as the long run? Does data support economic theory? How can this profit stream change over time?

Answer 1

It followed a monopoly market structure and dominated the American telegraph industry. (almost 90%). Western Union acquired monopoly power by acquiring its competition and consolidating them into one single huge company. This gave them a reliable and geographically extensive network to operate in which was highly profitable. It rebuilt poorly constructed lines and united them into a single network and also adopted the invention of an automatic repeater, eliminating the need to re-send attenuated signals.

• A monopoly market structure is characterized by a profit maximizing company or firm that is the price setter.
• It faces low degree of competition from other producers due to high barriers to entry in its market (resource or technological advantages.).
• The monopolist can make use of price discrimination.

Monopoly market structure frequently uses advertising to accomplish two related goals--product differentiation and market control.

Advertising is a way of informing buyers about differences in the products or creating the perception of such differences, to increase product differentiation and hence profits for own firm. Moreover, product differentiation also gives the firm some market control. If advertising convinces consumers about the superiority of a product when compared to other products, then that firm can charge a higher price.

Yes, this is observable in data. Many studies show that advertising helps in creating barriers to entry and thus protects the monopoly from competition. This economic theory is supported by data to some extent. A monopoly can earn super normal profits in both the short and long run.

In the long run, the monopoly might face increasing competition and thus its revenue might decrease depending on the degree of competition it faces. As the market matures, the monopoly might lose its resource/technological advantage or the legal barriers to entry (patent protection and IPR) which would harm its market power and thus its profits.