A monopoly firm fears that a p
- A monopoly firm fears that a potential rival firm will invent anew, similar product and enter the monopoly’s market. Therefore,both firms have an incentive to invent the new product. It is inthe monopoly’s interest to make sure that it is the first to inventto maintain its monopoly power.
- Explain how can the monopoly guarantee it is thefirst to invent.
[4 Marks]
- Patents were rated the least effective mechanisms ofappropriating the returns from a competitive advantage for newprocesses. What are the other mechanisms that are better means ofprotecting the comparative advantage forfirms?
Answer:
1. A monopoly can emphasis that it will be the first firm toinvent if it can have economies of scale. When comparing with thedemand for the product if it has the capability to generate hugeeconomies of scale then the firm can assure that it is the first toinvent.
Another means to guarantee the investment is to have the powerand control to regulate and use the resources necessary for thefirm to function.
2. Other than patents there are some other measures forprotecting the monopoly of the firm. This includes a strategicprice mechanism and creation of a prominent and powerful brandname.
By regulating the price of the product a firm can continuouslyearn the comparative advantage. This can be done by fixing theprice of the product very low when a new firm enter the market.This will discourage the new firm from conducting the business andit will exit the market. Thus the already existing firm earnsprofit and they can change the pattern of pricing later on.
Another way of protecting the comparative advantage is bycreating a strong brand name and canvasing large customer base. Ifthe customers are loyal they will stick on to the same brand.
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