In a patent-driven market, using the concept of minimum efficient scale of production, explain what would happen to competiton and to price when the patent expires?

Question

In a patent-driven market, using the concept of minimum efficient scale of production, explain what would happen to competiton and to price when the patent expires?

I don't see how I can interweave the minimum efficient scale of production into this question. I know that if the patent expires, competition will increase and the price will drop to the average total cost. Any ideas?

Answer 1

Certainly! Let's start by understanding the concept of the minimum efficient scale of production (MES). MES refers to the quantity of output at which a firm can produce goods or services with the lowest average total cost. It represents the point where the firm achieves optimal production efficiency.

Now, let's analyze what would happen to competition and price when a patent expires in a patent-driven market using the concept of MES.

1. Competition: When a patent expires, it allows other firms to enter the market and produce the patented product or offer similar alternatives. This increase in competition can be explained with the notion of MES. Prior to the expiration, the patent-holder had a monopoly, which typically implies higher prices and reduced competition. However, once the patent expires, other firms can enter the market, increasing the number of competitors. As a result, competition intensifies, putting pressure on all firms to improve efficiency, reduce costs, and differentiate themselves to gain an advantage in the market.

2. Price: With increased competition, the prices of the patented product are likely to decrease. This decrease in price can be linked to the concept of MES as well. When a patent is in effect, the patent holder has the ability to control the market and potentially charge higher prices due to limited competition. However, when the patent protection ends, new entrants and competitors can offer similar products, leading to more options for consumers and driving prices down. In a competitive market, prices tend to gravitate towards the average total cost of production. This means that prices may eventually drop to a level where firms can still cover their costs while remaining competitive.

Overall, the expiration of a patent in a patent-driven market usually leads to increased competition and a decrease in prices. The concept of MES helps us understand how competition and price dynamics change in such scenarios.