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
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
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
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