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Monopoly Vs Perfect Competition

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Suppose your firm has the opportunity to purchase either of two drugstores. One is the only drugstore in a small town and the building inspector there has guaranteed that no additional drugstores will be permitted. The second is a drugstore in a large city where there are hundreds of competitors. Is the purchase of the monopoly store the better decision?

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As guaranteed by building inspector that no additional drugstores will be permitted, opening a drugstore in a small town will enjoy a monopoly power as there is a legal barrier to entry for other drugstores. This store can sell its products at prices which are above their marginal costs and can earn economic profit.

Now let us look at the other part of the story. Opening a store in a competitive ...

Solution Summary

The solution discusses the pros and cons of opening a drugstore in a small town.