Consider Enrite, a monopoly producer of synergy services.
a. How does Enrite choose how much output to produce?
b. In a graph, illustrate Enrite's monopoly profit maximizing position. Indicate in your graph Enrite's profit-maximizing output (Q*M), price (P*M) and profits. Also show the dead-weight loss
Now, suppose that Enrite, which has branches in towns all over the country, is found guilty of monopolization and has its barriers to entry removed. Enrite is split up into many, many small firms.
Synergy services are a homogeneous product and there is now free entry into and exit out of this price-taking industry. In short, the synergy industry has become perfectly competitive. (Assume that industry demand remains the same, whether synergy is sold monopolistically or competitively, thus the demand curve is the same in both cases. Also the supply of synergy services is identical to Enrite's marginal cost of supplying synergy services, thus the MC curve for the monopolist becomes the supply curve for the competitive industry.)
c. Compare the market-wide result of the individual perfectly competitive firms' choices of profit-maximizing output level with the choice of the monopolist. Explain the implications of the break-up for the profitability of industry members, for society's welfare and for efficiency.
Show the new result in your graph. (Label Q*C and P*C.)