Question

The U.S. Postal Service has a monopoly on nonurgent First Class Mail. Pfizer Inc. makes LIPITOR, a prescription drug that lowers cholesterol. Cox Communications is the sole provider of \(\mathrm{ca}-\) ble television service in some parts of San Diego. Are any these firms protected by a barrier to entry? Do any of these firms produce a good or service that has a substitute? Might any of them be able to profit from price discrimination? Explain your answers. Use the following table to work Problems 2 to 4 Minnie's Mineral Springs is a single-price monopoly. Columns 1 and 2 of the table set out the market demand schedule for Minnie's water and columns 2 and 3 set out Minnie's total cost schedule. $$\begin{array}{ccc} \begin{array}{c} \text { Price } \\ \text { [dollars } \\ \text { per bottle) } \end{array} & \begin{array}{c} \text { Quantity } \\ \text { (bottles } \\ \text { per hour) } \end{array} & \begin{array}{c} \text { Total cost } \\ \text { (dollars } \\ \text { per hour) } \end{array} \\ \hline 10 & 0 & 1 \\ 8 & 1 & 3 \\ 6 & 2 & 7 \\ 4 & 3 & 13 \\ 2 & 4 & 21 \\ 0 & 5 & 31 \end{array}$$

Short answer

The U.S. Postal Service, Pfizer Inc., and Cox Communications are protected by barriers to entry. All have substitutes for their products or services and can profit from price discrimination.

Step-by-step solution

Identify Barriers to Entry

Determine whether each firm mentioned in the exercise is protected by barriers to entry. A barrier to entry makes it difficult for potential competitors to enter the market.

Identifying the U.S. Postal Service

The U.S. Postal Service has a government-granted monopoly on nonurgent First Class Mail. This monopoly is protected by legal and regulatory barriers to entry.

Identifying Pfizer Inc.

Pfizer Inc. holds patents for LIPITOR. Patents are legal barriers to entry as they prevent other firms from producing and selling the same prescription drug until the patents expire.

Identifying Cox Communications

Cox Communications has a monopoly in certain regions due to high startup costs associated with cable infrastructure, which acts as a financial barrier to entry for potential competitors.

Determine Substitutes for Goods and Services

Next, identify if the products and services provided by these firms have any substitutes in the market.

Substitutes for the U.S. Postal Service

The U.S. Postal Service faces competition from electronic mail (email) and other delivery services such as UPS and FedEx as substitutes.

Substitutes for Pfizer Inc.

LIPITOR competes with other cholesterol-lowering drugs, both branded and generic, that act as substitutes.

Substitutes for Cox Communications

Cable television services provided by Cox Communications have substitutes such as streaming services (e.g., Netflix, Hulu) and satellite TV.

Assess Potential for Price Discrimination

Evaluate whether any of these firms can profit from price discrimination by charging different prices to different customer groups.

Price Discrimination for the U.S. Postal Service

The U.S. Postal Service could engage in price discrimination by offering discounts or different rates for bulk mailings or other service categories.

Price Discrimination for Pfizer Inc.

Pfizer Inc. could use price discrimination by charging different prices for LIPITOR in different countries or offering discounts to certain groups (e.g., seniors, insurance plans).

Price Discrimination for Cox Communications

Cox Communications could engage in price discrimination by offering different packages or promotional rates to new customers versus long-term customers.

Minnie's Mineral Springs Analysis

Analyze Minnie's Mineral Springs, a single-price monopoly, using the provided data. Calculate the total revenue, marginal revenue, and marginal cost.

Total Revenue Calculation

Total revenue is found by multiplying the price by the quantity demanded. For example, if the price is \(8 and the quantity demanded is 1 bottle, total revenue is \)8 \times 1 = $8.

Marginal Revenue Calculation

Marginal revenue is the change in total revenue from selling one more unit. Calculate marginal revenue between each quantity level.

Marginal Cost Calculation

Marginal cost is the change in total cost from producing one more unit. Calculate marginal cost between each quantity level.

Key concepts

Barriers to Entry

When discussing barriers to entry, we're talking about obstacles that prevent new firms from entering a market. These barriers can be **legal, financial, or technological**. For instance, the **U.S. Postal Service** benefits from a **government-granted monopoly** for nonurgent First Class Mail. This means no other firm can legally offer the same service, which is a significant legal barrier. Another example is **Pfizer Inc.** which holds **patents** for LIPITOR. These patents give Pfizer exclusive rights to produce and sell the drug, creating a formidable legal barrier. Lastly, **Cox Communications** faces high startup costs for cable infrastructure, which act as a financial barrier, deterring new competitors. These examples illustrate how barriers to entry can protect firms from potential competition.

Substitute Goods

Substitute goods are products or services that can be used in place of each other. Understanding substitutes is crucial for analyzing market dynamics. For example, the **U.S. Postal Service** competes with substitutes like **email, UPS, and FedEx**. Despite its monopoly, these alternatives provide different ways to send mail and packages. Likewise, **Pfizer Inc.'s LIPITOR** faces competition from other cholesterol-lowering drugs, including both branded and generic options. Even **Cox Communications** has substitutes such as **streaming services** like Netflix and Hulu, and **satellite TV** providers. Recognizing these substitutes helps understand the competitive pressure each firm faces, even in a monopoly.

Price Discrimination

Price discrimination occurs when a firm charges different prices for the same product to different customers. This can maximize profits by capturing consumer surplus. For example, the **U.S. Postal Service** could offer **discounts for bulk mailings** or vary rates based on delivery speed. Pfizer Inc. could charge different prices for LIPITOR in different countries or offer discounts to groups like seniors. **Cox Communications** might offer **special rates for new customers** or different pricing tiers for various service packages. These strategies allow firms to better tailor their pricing to different segments of their customers, increasing profitability.

Monopoly Market Analysis

Analyzing a monopoly involves understanding its pricing, costs, and how it maximizes profit. Let's look at **Minnie's Mineral Springs**, a single-price monopoly. To analyze this, we need to calculate total revenue, marginal revenue, and marginal cost. Total revenue is calculated by multiplying the **price per unit by the quantity sold**. Marginal revenue is the additional revenue from selling one more unit, and marginal cost is the extra cost of producing one more unit. For instance, if the price per bottle is \(8 and quantity is 1, total revenue is 8 \times 1 = \)8. By comparing marginal revenue and marginal cost at different levels of output, Minnie's Mineral Springs can determine the optimal quantity to produce for maximum profit. This kind of analysis helps understand how monopolies make decisions and operate in the market.