Question

A manufacturer of pots and pans advertises on late-night cable television a set of “patented no-stick surface cookware,” called “Miracle Cookware.” The advertisement states, “Miracle Cookware is not available in any store.” If you go to a household supply retailer, you can find many other cookware brands that claim to have exactly the same attributes that Miracle Cookware claims. One of these brands is “Never-stick Cookware.” It turns out “Miracle Cookware” and “Never-stick Cookware” are made by the same company. Provide an explanation for this, and a prediction as to which sells at a higher price, Miracle Cookware or Never-stick Cookware, ignoring shipping costs. Illustrate reasoning with appropriate graphs and explain in words.

Answer 1

A patent provides monopoly type power to a firm. Till the existence of the patent, the firm has exclusive right over the production of that product.

After expiry of patent, or without patent, the market is competitive.

In this case, the same firm makes “Miracle Cookware” and “Never-stick Cookware”.

However, “Miracle Cookware” will sell at a higher price - being patented, and the patent is the main differentiating factor, it behaves like a monopoly.

“Never-stick Cookware” will sell at a lower price - being non-patented, it faces a competitive market

Consumers will be willing to pay a higher price for the patented product.

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Main Differences

In a market with a patent, P > MC and quantity sold is lower

The firm sets quantity as per MC = MR, and sets price as per Demand (max. WTP).

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In a competitive market, P = MC and quantity sold is higher

It resembles a competitive market.