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Monopoly Market Structure

A monopoly is a market structure with a single supplier of a product that has no close substitutes. Monopolies exist due to barriers to entry that prevent competition, such as economies of scale, actions by existing firms to keep others out, and government barriers like patents. There are different types of monopolies including natural monopolies due to economies of scale, local monopolies in a geographic area, and regulated monopolies whose behavior is overseen by the government.

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910 views12 pages

Monopoly Market Structure

A monopoly is a market structure with a single supplier of a product that has no close substitutes. Monopolies exist due to barriers to entry that prevent competition, such as economies of scale, actions by existing firms to keep others out, and government barriers like patents. There are different types of monopolies including natural monopolies due to economies of scale, local monopolies in a geographic area, and regulated monopolies whose behavior is overseen by the government.

Uploaded by

ramkinkertiwari
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Monopoly

Chapter 11-1
The market structure of Monopoly
What is a Monopoly?
• A monopoly is a market structure in which there is
a single supplier of a product.

• The monopoly firm (monopolist):


– May be small or large.
– Must be the ONLY supplier of the product.
– Sells a product for which there are NO close substitutes.

• Monopolies are fairly common: U.S. Postal


Service, local utility companies, local cable
providers, etc.
Introduction
• Monopoly is a market structure in which a
single firm makes up the entire market.
• Monopolies exist because of barriers to
entry into a market that prevent
competition.
The Creation of Monopolies
• Monopolies often arise as a result of barriers to entry.

• Barrier to entry: anything that impedes the ability of firms


to begin a new business in an industry in which existing
firms are earning positive economic profits.

• There are three general classes of barriers to entry:


– Natural barriers, the most common being economies of
scale
– Actions by firms to keep other firms out
– Government (legal) barriers
Economies of Scale
• In some industries, the larger the scale of
production, the lower the costs of production.

• Entrants are not usually able to enter the market


assured of or capable of a very large volume of
production and sales.

• This gives incumbent firms a significant advantage.

• Examples are electric power companies and other


similar utility providers.
Economies of Scale
Actions by Firms
• Entry is barred when one firm owns an
essential resource.

• Examples are inventions, discoveries,


recipes, and specific materials.
– Microsoft owns Windows, and has been
challenged by the U.S. Dept. of Justice as a
monopolist.
Government
• Governments often provide barriers, creating
monopolies.

• As incentives to innovation, governments


often grant patents, providing firms with
legal monopolies on their products or the use
of their inventions or discoveries for a period
of 17 years.
Not in your book but another way to
look at barriers
• Legal barriers, such as patents, prevent
others from entering the market.

• Sociological barriers – entry is


prevented by custom or tradition.
• Natural barriers – the firm has a unique
ability to produce what other firms can’t
duplicate.

• Technological barriers – the size of the


market can support only one firm.
Types of Monopolies
• Natural monopoly: A monopoly that arises from
economies of scale. The economies of scale arise from
natural supply and demand conditions, and not from
government actions.
• Local monopoly: a monopoly that exists in a limited
geographic area.
• Regulated monopoly: a monopoly firm whose behavior
is overseen by a government entity.
• Monopoly power: market power, the power to set prices.
• Monopolization: an attempt by a firm to dominate a
market or become a monopoly.
Regulated Monopolies
• The Florida Public Service Commission
exercises regulatory authority over utilities in the
state of Florida in one or more of three key
areas: rate regulation; competitive market
oversight; and monitoring of safety, reliability,
and service.

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