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What would be total royalties the innovator could collectAnswered

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Reference no: EM132397793

Consider an industry which makes e-book devices (like Amazon’s Kindle and Barnes and Noble’s Nook). Suppose the total demand for a device is given by P = 50 – q, where P is the price per unit and q the quantity. Let the constant marginal cost of producing a device be equal to 25.

a. Suppose the industry is a monopoly. [Imagine that BAIDU and Google merged and formed one large firm, called Mono-cracy.] Find the equilibrium price, quantity, and profits of the industry.

b. Suppose a technological breakthrough occurs which reduces the cost of manufacturing an c-book device. This process technology now allows a firm to produce the device at a constant marginal cost of 20. Again assume a monopoly. Find the new equilibrium price, quantity, and profits of the industry. How much did the monopoly gain from the innovation?

c. Go back to the beginning (prior to the innovation). Suppose the industry were perfectly competitive instead of a monopoly. We want to figure out what the gain from innovation is to an innovator in a competitive industry. So, first, find what the competitive industry’s price, quantity, and profits would be initially (if marginal costs of production equal 25). Then, imagine the same innovation has occurred, i.e. an innovator discovers a new method of producing e-book devices which reduces the constant marginal cost of production from 25 to 20. If the innovator licenses this technology to all the firms in the competitive industry, what royalty fee could the innovator charge per unit (i.e. per e-book device) and what would be the total royalties the innovator could collect? [Hint: under licensing, the new marginal cost of production facing a competitive firm will be the marginal cost of manufacture plus the royalty fee.]

d. What can you say about which industry type (competition or monopoly) generates greater incentives for innovation?

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