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Monopoly increases profits through licensing

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World Class Manufacturing Operations has enjoyed rapid growth in sales and high operating profits. But now the company faces potentially fierce competition from a large number of new competitors as WCMO's important basic patents expire during the coming year. Unless the company is able to thwart such competition, severe downward pressure on price and profit margins is anticipated.

Use the price, output, and total cost data below to answer the questions following the table where all data except price are in millions:

Price Monthly Total Marginal Total Marginal Average Total
Output Revenue Revenue Cost Cost Cost Profit
$20 0 $0 $0 $0 $0 $0 $0
19 1 19 $19 12 $12 $12.00 $ 7.00
18 2 36 17 27 15 13.50 9.00
17 3 51 15 42 15 14.00 9.00
16 4 64 13 58 16 14.50 6.00
15 5 75 11 75 17 15.00 0
14 6 84 9 84 9 14.00 0
13 7 91 7 92 8 13.14 -1.00
12 8 96 5 96 4 12.00 0
11 9 99 3 99 3 11.00 0
10 10 100 1 105 6 10.50 -5.00
[Total costs include a risk-adjusted normal rate of return.]
(A) If the cost conditions remain constant, what is the monopolistically competitive high price-low output equilibrium in this industry? What are the industry profits?
(B) Under these same cost conditions, what is the monopolistically competitive low price-high output equilibrium in this industry? What are the industry profits?
(C) Now assume that WCMO is able to enter into restrictive licensing agreements with potential competitors and create an effective cartel in the industry. If demand and cost conditions remain constant, what is the cartel price-output and profit equilibrium?

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Solution Preview

A. Usually, a monopoly will maximize profits at MC=MR. But, because we are dealing with units, it isn't always just a point. Note first that this monopoly has no Fixed Costs. The Total Cost is only the addition of each subsequent MC to the previous ones. There are two profit maximizing possibilites, a monthly output of 2 sold at $18 each, or a monthly output of 3 sold at $17. In both cases profit is $9. The answer to ...

Solution Summary

A table of costs and profits for a monopoly is provided and optimal solutions are found for the monopoly. The most interesting of three questions provided is C. In it, we discuss the optimal choice, when the monopolist can impose restrictive licensing on their competitors, when MC are lowest at low outputs.

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