Page 614 - Krugmans Economics for AP Text Book_Neat

Technological Superiority A firm that maintains a consistent technological advan-
tage over potential competitors can establish itself as a monopolist. For example, from
the 1970s through the 1990s, the chip manufacturer Intel was able to maintain a con-
sistent advantage over potential competitors in both the design and production of mi-
croprocessors, the chips that run computers. But technological superiority is typically
not a barrier to entry over the longer term: over time competitors will invest in upgrad-
ing their technology to match that of the technology leader. In fact, in the last few years
Intel found its technological superiority eroded by a competitor, Advanced Micro De-
vices (also known as AMD), which now produces chips approximately as fast and as
powerful as Intel chips.
We should note, however, that in certain high-tech in-
dustries, technological superiority is not a guarantee of
success against competitors. Some high-tech industries
are characterized by network externalities, a condition that
arises when the value of a good to a consumer rises as the
number of other people who also use the good rises. In
these industries, the firm possessing the largest net-
work—the largest number of consumers currently using
its product—has an advantage over its competitors in at-
tracting new customers, an advantage that may allow it
to become a monopolist. Microsoft is often cited as an exam-
Photodisc ple of a company with a technologically inferior product—its
computer operating system—that grew into a monopolist
through the phenomenon of network externalities.
Government-Created Barriers In 1998 the pharmaceutical company Merck intro-
duced Propecia, a drug effective against baldness. Despite the fact that Propecia was
very profitable and other drug companies had the know-how to produce it, no other
firms challenged Merck’s monopoly. That’s because the U.S. government had given
Merck the sole legal right to produce the drug in the United States. Propecia is an ex-
ample of a monopoly protected by government-created barriers.
The most important legally created monopolies today arise from patents and copy-
rights. A patent gives an inventor the sole right to make, use, or sell that invention for a
period that in most countries lasts between 16 and 20 years. Patents are given to the
creators of new products, such as drugs or mechanical devices. Similarly, a copyright
gives the creator of a literary or artistic work the sole right to profit from that work,
usually for a period equal to the creator’s lifetime plus 70 years.
The justification for patents and copyrights is a matter of incentives. If inventors were
not protected by patents, they would gain little reward from their efforts: as soon as a valu-
able invention was made public, others would copy it and sell products based on it. And if
inventors could not expect to profit from their inventions, then there would be no incen-
tive to incur the costs of invention in the first place. Likewise for the creators of literary or
artistic works. So the law allows a monopoly to exist temporarily by granting property
rights that encourage invention and creation. Patents and copyrights are temporary be-
cause the law strikes a compromise. The higher price for the good that holds while
the legal protection is in effect compensates inventors for the cost of invention; conversely,
the lower price that results once the legal protection lapses benefits consumers.
Because the lifetime of the temporary monopoly cannot be tailored to specific cases,
this system is imperfect and leads to some missed opportunities. In some cases there
can be significant welfare issues. For example, the violation of American drug patents
by pharmaceutical companies in poor countries has been a major source of contro-
versy, pitting the needs of poor patients who cannot afford to pay retail drug prices
A patent gives an inventor a temporary against the interests of drug manufacturers who have incurred high research costs to
monopoly in the use or sale of an invention. discover these drugs. To solve this problem, some American drug companies and poor
A copyright gives the creator of a literary or countries have negotiated deals in which the patents are honored but the American
artistic work the sole right to profit from that companies sell their drugs at deeply discounted prices. (This is an example of price dis-
work. crimination, which we’ll learn more about later.)
572 section 10 Behind the Supply Curve: Profit, Production, and Costs