Question

Each of the following firms possesses market power. Explain its source. a. Merck, the producer of the patented cholesterollowering drug Zetia b. WaterWorks, a provider of piped water c. Chiquita, a supplier of bananas and owner of most banana plantations d. The Walt Disney Company, the creators of Mickey Mouse

Short answer

Merck's market power comes from patents; WaterWorks has a natural monopoly; Chiquita's market power stems from control over supply due to plantation ownership; Disney's power is due to trademarks over its characters.

Step-by-step solution

Source of Merck's Market Power

Merck has market power from its patent over Zetia, a cholesterol-lowering drug. Patents provide an exclusive right to produce and sell the patented product, preventing other firms from entering the market with the same product. As a result, Merck can set prices above competitive levels because they face little to no competition for this drug.

Source of WaterWorks' Market Power

WaterWorks possesses market power due to it being a natural monopoly. The natural monopoly exists because the infrastructure for piped water is very costly to build and duplicate. Once in place, it's inefficient for additional firms to enter the market and lay down new pipes. Thus, WaterWorks can set prices without fearing competition, as there is a substantial barrier to entry for potential rivals.

Source of Chiquita's Market Power

Chiquita's market power originates from its ownership over most banana plantations. This ownership gives the company control over a significant portion of the banana supply. As a monopolistic owner of these resources, Chiquita can influence the market price of bananas by controlling the quantity available in the market.

Source of The Walt Disney Company's Market Power

The Walt Disney Company holds market power through its trademark over Mickey Mouse and other unique characters and intellectual properties. The trademark protects its characters, preventing other firms from using them, thereby allowing Disney to exercise control over related products and their prices.

Key concepts

Patent Monopolies

Patent monopolies play a crucial role in the pharmaceutical industry, as they grant companies like Merck exclusive rights to market a product, like the cholesterol-lowering drug Zetia.

Upon approval, patents create significant barriers to entry for competitors, ensuring the patent holder can control pricing and distribution without immediate threat of identical competition. This exclusive period allows companies to recoup research and development costs and invest in future innovations. However, it also poses questions about accessibility and pricing for consumers due to the lack of competitive alternatives during the patent period.

Natural Monopolies

Natural monopolies, exemplified by WaterWorks' ownership of piped water systems, arise when a single firm can provide a service at a lower cost than any potential competitor.

The high cost of infrastructure in industries like utility services makes it impractical for multiple companies to build parallel systems. Natural monopolies therefore often face regulation to prevent abuse of market power. While natural monopolies benefit from economies of scale, regulators must balance this efficiency against the need for fair pricing and maintaining service quality.

Resource Control

Resource control is another form that market power can take, as demonstrated by Chiquita's significant ownership of banana plantations.

Control over essential resources grants companies the ability to manipulate market supply and therefore influence prices. This power stems from the ownership of a large proportion of the resources needed to produce a commodity that other firms cannot readily access or substitute. While offering benefits like vertical integration and supply stability for the controlling firm, it also raises concerns about market competitiveness and fairness.

Trademark Protection

Trademark protection is a tool that allows companies to safeguard their brand identity, as The Walt Disney Company has done with Mickey Mouse.

Trademarks prevent other businesses from using the same or confusingly similar marks, thereby protecting the company's investment, brand loyalty, and consumer trust. They are a significant part of a firm's intellectual property strategy, contributing to maintaining a unique market position and the ability to charge premium prices for branded products.

Barriers to Entry

Barriers to entry are the obstacles that new firms face when trying to enter an established market.

These barriers can include high startup costs, stringent regulations, strong brand loyalty for existing products, and restricted access to necessary resources or distribution channels. Barriers to entry solidify the market position of incumbent firms, reduce the threat of new entrants, and help maintain market power for companies already established within the industry.