Week 3: Intellectual Property Flashcards
Fill in the blank: High fixed costs only work if you ______.
charge a price above the marginal costs
What do monopolies charge at?
Monopolies charge above marginal costs because they seek to maximize revenue
What is the policy solution?
to set price at the monopoly price rather than the marginal cost
Why is Article 1 Section 8 of the Constitution important?
authors and investors have the exclusive right to their respective writings and discoveries, exclusive meaning that the creator has temporary monopoly and can charge the monopoly price
Rent
the difference between the marginal cost and the monopoly price
e.g marginal cost for a CD is $1 but monopoly price is $15
What is the functional purpose for rents?
to help pay off fixed costs
In a free market, what will happen to price?
The price will converge at the marginal cost
This occurs because when profits are very high, competitors will enter the market until they drive down the prices. HOWEVER, it does not work this way in media because the price has to be higher than the marginal costs or you’d never pay off fixed costs
What causes piracy?
The tension between marginal costs and monopoly price
Pirates can sell at below monopoly price but above marginal costs
What is the result of piracy on the market?
Can lead to market failure
Market Failure
when a willing buyer and willing seller can’t come to a deal
Market Failure Example
Warner Bros is willing to spend $150 million to make the Batman movie
Buyer doesn’t pay $20 to see in theaters because they can watch for free on a sketchy website.
If Warner Bros knows this will happen, they’ll decide not to make the movie after all because they wouldn’t be able to pay it off
What can help prevent piracy?
intellectual property rights
