When Is It Sensible for a Monopolist Not to Take

question 145

Multiple Choice

When is it sensible for a monopolist not to take measures to prevent other firms from entering the market? In
1945, Reynolds International Pen Corporation introduced a revolutionary product: the ballpoint pen. The
new type of pen could be produced with a very simple production technology. For three years, Reynolds
earned enormous profits on this innovative product. In 1948, Reynolds stopped producing pens, dropping
out of the market entirely. What happened? The key to solving this puzzle is the fact that Reynolds earned
enormous profits for a short time. The simple technology of the ballpoint pen could be copied easily by other
producers, so the price required to deter entry–the limit price–was low. The limit price was so low that it was
better for Reynolds to charge a high price and squeeze out as much profit as possible from a short-lived
monopoly. Reynolds sold its pens for $12.50, about 16 times the average production cost of $0.80. By 1948, a
total of 100 firms had entered the ballpoint market, and the price had fallen to the average cost of production,
so each firm made zero economic profit.
SOURCE: Thomas Whiteside, ʺWhere Are They Now?ʺ New Yorker, February 17, 1951, pp. 39—58.
-Recall the Application ʺReynolds International Takes the Money and Leaves the Market.ʺ In 1945 Reynolds International Pen Corporation invented the ball point pen, but by 1948 were not longer producing ball point pens because:

• A)they made high profits for three years and did not want to earn lower profits from 1948 on.
• B)they lost money on the pens.
• C)the limit price was too high to maintain sales.
• D)the deterrence quantity was too low to make a profit.