LESSON 14 INDUSTRIES & MONOPOLY PRICE.pdf

Innovators like microsoft apple amgen herseys

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products - these activities MUST be compensated -- or they will not happen. Innovators like Microsoft, Apple, Amgen, Hersey's Chocolate, and writers and artists like author Dean Koontz and singer Rihanna will sometimes lock in their exclusive right to earn income from an innovation. The legal protections they want are called: patents and copyrights . Economists sometimes say these legal protections are "needed" -- to allow the innovator time to recover the heavy costs of innovation - - the R&D costs developing a new product. So a Patent and Copyright is issued to the inventor or artist. The patent protects them from competition (no one else can use of their invention idea) for a limited time period - for “X number of years. More on this below. Natural Monopoly. Picture a street, with dozens of houses and apartment buildings along it on both sides. Suppose a new product called "the land-line telephone" is invented. To provide this new service, "land lines" or telephone poles must be installed down the street. If the last house (at the end of the street) is the first customer to says, "Yes! I want this thing called a telephone," and all the telephone poles are installed to his house, great! He gets phone service. For services like land-line phone service or electricity, the biggest cost is called a "Fixed Cost" -- or those rows of land-line telephone poles which had to be installed. Once those are done, the service has no additional costs to speak of. The rest of the costs are minor such as billing, or minor repairs to the telephone poles. When the fixed cost is the largest cost of producing a service, the industry is characterized a "Natural Monopoly." It is better (cheaper) for the customers -- to have only one company provide that service. For land-line phone services, what if another house on the street we mentioned decides
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to get Phone service -- what would be cheaper for the home owner - hire another 2nd company - - and put in an entirely new set of telephone poles? Or just go to the original company, and have them string a phone line to the second house, off the existing set of landline poles? The latter arrangement is cheaper -- just use the existing company and its telephone poles, for the entire street (all customers). When a natural monopoly seems to exist, one firm will provide the service, at least until a new innovation (cell phones!) comes along that is cheaper, and "replaces" them! Natural monopolies have market power when they exist though, so their pricing is usually regulated by the government and a citizen advisory board since they have no competition to naturally constrain their pricing. Example of Natural Monopolies: most utilities - phone service, natural gas service ("The Gas Co."), water & sewer service (the pipes underground are the main "Fixed Cost"), and power (electricity), also Cable TV could be considered a nat. monopoly.
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