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Monopoly

• A monopoly is the sole supplier of a product with no close substitutes

• The most important characteristic of a monopolized market is barriers to entry new firms cannot profitably enter the market

• Barriers to entry are restrictions on the entry of new firms into an industry– Legal restrictions– Economies of scale– Control of an essential resource

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• The two types of monopolies that exist are the natural monopoly and the government protected monopoly.

Legal Restrictions

• One way to prevent new firms from entering a market is to make entry illegal

• Patents, licenses, and other legal restrictions imposed by the government provide some producers with legal protection against competition

Patent and Invention Incentives

• A patent awards an inventor the exclusive right to produce a good or service for 20 years

• Patent laws– Encourage inventors to invest the time and money required

to discover and develop new products and processes– Also provide the stimulus to turn an invention

into a marketable product, a process called innovation

Licenses and other Entry Restrictions

• Governments often confer monopoly status by awarding a single firm the exclusive right to supply a particular good or service

– Broadcast TV and radio rights

– State licensing of hospitals

– Cable TV and electricity on local level

Economies of Scale

• A monopoly sometimes emerges naturally when a firm experiences economies of scale as reflected by the downward-sloping, long-run average cost curve

• In these situations, a single firm can sometimes supply market demand at a lower average cost per unit than could two or more firms at smaller rates of output

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Put another way, market demand is not great enough to permit more than one firm to achieve sufficient economies of scale a single firm will emerge from the competitive process as the sole seller in the market.

Natural Monopoly• Because such a monopoly emerges from the nature of

costs, it is called a natural monopoly. • Ex:

• Natural monopolies form due to a produced product or service that does not have an adequate substitute. Sometimes technology or existing resources deem that it most efficient for a single firm to produce the product. A prime example of this is utility companies.

Control of Essential Resources

• Another source of monopoly power is a firm’s control over some nonreproducible resource critical to production– Professional sports teams try to block the formation of

competing leagues by signing the best athletes to long-term contracts

– Alcoa was the sole U.S. maker of aluminum for a long period of time because it controlled the supply of bauxite

– China is the monopoly supplier of pandas– DeBeers controls the world’s diamond trade

Public Policy Toward Monopolies

• Increasing competition with antitrust laws– Sherman Antitrust Act, 1890

• Reduce the market power of trusts (Trusts are monopolies that squeezed out disobedient competitors and set market policies)

• Break up Cartels (agreements between competing firms to fix prices)

– Clayton Antitrust Act, 1914• Strengthened government’s powers• Authorized private lawsuits

– Prevent mergers– Break up companies– Prevent companies from coordinating their activities to make

markets less competitive

Your Turn

• What are oligopolies?• Using publisher or poster board, create a

poster about oligopolies:– What are they? Details…– Are they legal or illegal? Why?– What some examples of oligopolies?– What are three types of mergers?

• Use pictures to make your poster creative.