1. Verizon Wireless, AT&T, T-Mobiles and Sprint together provide over 90% cellphone services in the US wireless voice & data market. Each of these service providers spends hundreds of millions of dollars a year on television advertising to promote their coverage and quality of voice, video and data services. Obviously, if one company is advertising its service quality heavily, the other must also advertise to protect their customer base (market share). The similar situation applies to US based major beer companies such as Budweiser (now owned by a Belgium based beer company called InBev), Miller and Coors who together produce 85% of all beer consumed in the US, each spend well over $250 million a year on television advertising campaigns.
Do you think these firms would welcome congressional legislation which restricted the amount that any one firm could spend on advertising to $1 million yearly, and thereby allowed them all to drastically reduce their costs (and thus increasing profits) without fear of losing ground to each other? Explain your answer in both cases.
2. Assume the graph below represents the market demand for a patented prescription drug together with the long run marginal cost and average cost functions for producing the drug. (note: the diagram assumes that at output levels over 50 million AFC ~ 0, and MC is constant so that ATC = AVC =MC = $20)
A) Draw the marginal revenue function for this firm.
B) What is the profit maximizing price for this firm?
C) On the graph show the area which represents the net loss to society resulting from the monopoly power conferred by the patent.
D) What do you predict will happen to the structure of competition and to the price in this market when the patent expires ? (Hint: use the concept of “Minimum efficient scale ” of production in your answer.)
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