Monopoly Power in Electronic markets

Readers Question: describes how markets for electronic goods and software are sometimes dominated by
a single type of product, which incorporates the technology developed and controlled by one of the firms in the market. Do you agree that this reduces competition and is bad for consumers and producers? Justify your answer. (15)  AQA unit 1

A difficult question for AS level

The firm with the patent can charge monopoly prices for using the technology. Therefore, this leads to higher prices for consumers and less competition, because new firms may not be able to afford the rights to use the technology.

However, the fact that many companies are in the market suggests the market is competitive. For example, there are several firms selling computers based on the micro chip.

The common technology may be a small % of total costs. e.g. microchip may only be 5% of the total cost. Therefore, even if one firm has monopoly power in selling micro chips (intel) it doesn’t affect prices and competition too much.

The monopoly power from developing a good technology gives firms the incentive to invest in research and development. Without the profits from monopoly, there would be little incentive for firms to take risks and generate better products. In electronic goods new technology is important for providing better quality goods.

If one firms concentrates on producing a certain technology it can benefit from economies of scale. This can lead to lower average costs and lower prices for consumers.

In theory other firms could design their own technology, but, it may be cheaper just to buy it from a monopoly

By on November 13th, 2007

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