Monopoly 1

CHAPTER 15 – MONOPOLY

In competition, freedom of entry is one of the keys to the outcomes of efficiency and low prices. The threat of competition, along with private property ownership, is which people keep the results of their efforts, is what keeps everyone on her toes.

But to every existing firm, that threat translates into a motivation to conduct business in such a way as to keep these potential competitors out – called "barriers to entry" – those that they can erect themselves (or take advantage of), and those they can get the government to create.

In the first case, we have: "Natural" Monopoly – the presence of economies of scale so that the bigger you get, the more efficient you get (lower unit cost), so the first one that can get the jump on the rest can drive the rest out of business – Texas Instruments. (Another ex: often a large percentage of costs are Fixed Costs so that ATC declines continuously – as with utilities monopolies. No potential rival can ever get a toehold. So government regulates them.)

Sole Access to Resources – DeBeers Diamond monopoly. But the availability of in\\direct substitutes (rubies, emeralds ?) can undermine the market control. That’s why DeBeers advertises ("A diamond is forever.")

The second kind of monopoly is that established on behalf of a firm by government. Some say that it is the more prevalent kind of monopoly:

Patents and copyrights
Licenses to engage in an occupation and keep others out. Often this is based on some "public good" or "externality" argument: "Public Health and Safety" for example. "We can’t afford to let quacks practice medicine."

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This page was last updated on Friday, July 21, 2006.