When a firm grows, or merges with other companies in the industry to increase and has market share of 25 percent or above. Then this firm will have monopoly power and it is called monopolist. Monopolists can maintain their monopoly power by setting high barrier of entry. Barrier of entry can be set by low average cost of production, trade mark and patent legislation.
As mentioned in above passage, Sega had 38% and Nintendo had 25% shares of UK market. Therefore they are monopolists. And their monopoly power are protected by barrier of entry, which the cartridge games were protected by patent and game producers had to obtain a license and are were forced to buy blank tapes from Sega and Nintendo.
2. Monopolist can maximise their profit by producing their output level where marginal cost is equal to marginal revenue. Profit is equal to revenue after reducing the cost. Profit is maximised when marginal revenue is equal to marginal cost because if the monopolist produce one more unit after this level, there will be a negative effect on the profit. The profit monopolists earn is called supernormal profit which is extra profit over and above minimum level of profit necessary to keep incumbent firms in the market.
Another method for Sega and Nintendo to earn higher profit is that price their game consoles at a low price to attract customers to buy their consoles. And then charge the games cartridges at high price because the cartridges are specific and are not interchangeable, customers are forced to buy their cartridges after buying their consoles.
In monopoly, the monopolists can only choose to be a price-maker or a quantity-setter. Therefore the monopolists can control either the price or the quantity of a product. Sony uses a policy of price discrimination to capture the consumer surplus in terms to increase profit.
Sony charges a higher price with few quantities when it launches PlayStation3 and a lower price with higher quantity later. This policy is an example of price discrimination which Sony charges the customers, who are ready and able to pay more for a PlayStation3 when it launches, a higher price and charges the customers, who are not willing to pay that much for a PlayStation3, a lower price later. Sega and Nintendo can imitate the pricing policy used by Sony to earn more profit.
3. As mentioned above, barrier of entry to this gaming industry is protected by patents and licenses. Third party companies such as game producers need to pay huge amount of licenses fee to obtain royalties for producing game cartridges.
And now, third party companies are allowed to manufacture and sell blank tapes without royalties and fees. That means the monopolists cannot set up barrier of entry successfully and third party companies can freely manufacture and sell the tapes. The monopolists therefore face more competitors in producing blank tapes. Monopoly power of these monopolists to set up barrier of entry has been lessened.…