Question

Give an example of a monopoly market that is likely to become monopolistically competitive in the long run. What conditions would (could) bring this about? Will this benefit or hurt the society? Why?

Answer 1

Companies that are operating in pharmaceutical industry usually have patent over the drug they have developed. Unless the drug becomes generic, the company enjoys monopoly power in the market and it starts charging a higher price for the prescribed drug. As soon as the patent expires, other firms in the market start producing the same drug as it becomes generic. this is beneficial for the society because a generic drug can be purchased at quite a lower price and this increases the consumer surplus. There is a reduction in the deadweight loss due to monopoly which is again beneficial for the society. Production is done on a large scale when there are many firms operating in the market. This helps in treating a particular disease effectively.