CH13 1. The United States Postal Service has a monopoly on non-urgent First Class Mail and the exclusive right to put mail in private mailboxes. Pfizer Inc. makes LIPITOR, a prescription drug that lowers cholesterol. Cox Communications is the sole provider of cable television service in some parts of San Diego. a. What are the substitutes, if any, for the goods and services described above? Substitutes for the U.S. Postal Service include email, fax, and private delivery services, such as FedEx or UPS. Substitutes for Lipitor are other statin drugs, such as Zocor, non-statin drugs that also lower cholesterol, and exercise. Substitutes for Cox Communications include satellite television services. b. What are the barriers to entry, if any, that protect these three firms from competition? The U.S. Postal Service and Pfizer are protected by legal barriers to entry. The Postal Service has the legal right given to it by the Private Express Statutes to be the only first class non-urgent mail service and Pfizer has a patent on Lipitor. Cox Communications has a natural barrier to entry because it is a natural monopoly. It also has a legal barrier to entry because it has been given the public franchise to be the only cable provider in its area. c. Which of these three firms, if any, is a natural monopoly? Explain your answer and illustrate it by drawing an appropriate figure. Cox Communications is the only natural monopoly. Its average cost curve will look similar to that in Figure 13.1. Cox Communications has a large fixed cost of creating a massive infrastructure and then a small marginal cost when it increases the quantity of its customers. As a result, its economies of scale mean that its long-run average cost curve is downward sloping when it intersects the demand
curve. Neither the U.S. Postal Service nor Pfizer has such strong economies of scale so their long-run average cost curves are upward sloping when they intersect their demand curves. d. Which of these three firms, if any, is a legal monopoly? Explain your answer. Both the U.S. Postal Service and Pfizer are legal monopolies. The Postal Service has the legal right given to it by the Private Express Statutes to be the only first class non-urgent mail service and Pfizer has a patent on Lipitor. Cox has a public franchise. e. Which of these three firms are most likely to be able to profit from price discrimination and which are most likely to sell their good or service for a single price? All three of the firms practice price discrimination. The second ounce in a first class letter is less expensive to mail than the first ounce. Lipitor’s price varies according to the insurance policy a customer has. Cox Communications bundles packages of services that have a lower price than each item taken separately so that additional units of service are less expensive than the initial units. 2.
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