If cheaper foreign competition is unable to enter the market, there are fewer pressures on domestic companies. For example, when the patent of a small niche drug runs out; there may be few pharma companies that would want to compete.
This may be because the drug only serves a few hundred people, so there is little profit to be made. Therefore, there is a domestic monopoly. However, foreign drugs would be able to compete as they can access multiple national markets, which creates a larger consumer base and a greater potential for profit.
By being able to access more markets, what was a niche product, becomes a large and quite a lucrative market.
Yet many countries prevent this. This stops perfectly safe drugs from Europe from coming in and serving as a competition to the domestic monopoly. During the infancy of a market, the first entrant will be able to establish an initial monopoly position. This is because they are the first company in the market, without competition. For example, if a business was to create a hypothetical teleportation device, it would be the first to do so. In the early stages at least, it may have a monopoly until competitors are able to enter and create a similar product.
During these initial stages of a new market, it is easy for the first entrant to establish a monopoly. However, this usually does not last long as competitors see an opportunity. Geographic monopolies can be characterised by the sole presence within a local market. For example, there may only be one restaurant in the local town. If you want a meal out, you may have to travel half an hour to the nearest restaurant. When considering the local market; it can be considered as a monopoly.
Other examples of local monopolies may include a gas station that is the only supplier on the motorway. Whilst it does not have a monopoly over gas, it does within the bounds of its location. It is important to distinguish the difference between a monopoly, and monopolistic power. In a monopoly there is only one supplier in the market. This is different from monopolistic power in a number of ways. The difference is that monopolistic power means a company has monopoly like powers, but is not the sole provider.
In monopolistic competition, there are many firms in the market, but they compete on factors other than price.
Monopolistic markets are also characterized by low barriers to entry; something that is usually non-existent in monopoly markets. This allows new firms to easily come in and compete; in stark contrast to monopolies. Marginal Utility Definition Read More ». Types of Monopoly 1. Causes of Monopolies 2. So let us look at the 3 types of monopoly below: 1.
State Monopolies Another type of monopoly is the state monopoly. Network externalities also called network effects occur when the value of a good or service increases as a result of many people using it.
Because of network effects, certain goods or services that are adopted widely will appear to be much more attractive to new customers than competing goods or services. This is evident in online social networks. Social networks with the largest memberships are more attractive to new users, because new users know that their friends or colleagues are more likely to be on these networks.
It is also evident with certain software programs. For example, most people use Microsoft word processing software. While other word processing programs may be available, an individual would risk running into compatibility problems when sending files to people or machines using the mainstream software.
This makes it difficult for new companies to enter the market and to gain market share. There are two types of government-initiated monopoly: a government monopoly and a government-granted monopoly. There are instances in which the government initiates monopolies, creating a government-granted monopoly or a government monopoly.
Government-granted monopolies often closely resemble government monopolies in many respects, but the two are distinguished by the decision-making structure of the monopolist. In a government-granted monopoly, on the other hand, the monopoly is enforced through the law, but the holder of the monopoly is formally a private firm, which makes its own business decisions. In a government-granted monopoly, the government gives a private individual or a firm the right to be a sole provider of a good or service.
Potential competitors are excluded from the market by law, regulation, or other mechanisms of government enforcement. Intellectual property rights such as copyright and patents are government-granted monopolies. Additionally, the Dutch East India Company provides a historical example of a government-granted monopoly. It was granted exclusive trading privileges with colonial possessions under mercantilist economic policy. In a government monopoly, an agency under the direct authority of the government itself holds the monopoly, and the monopoly is sustained by the enforcement of laws and regulations that ban competition or reserve exclusive control over factors of production to the government.
The state-owned petroleum companies that are common in oil-rich developing countries such as Aramco in Saudi Arabia or PDVSA in Venezuela are examples of government monopolies created through nationalization of resources and existing firms. The United States Postal Service is another example of a government monopoly.
It was created through laws that ban potential competitors from offering certain types of services, such as first-class and standard mail delivery. Around the world, government monopolies on public utilities, telecommunications systems, and railroads have historically been common. Postal Service : The postal service operates as a government monopoly in many countries, including the United States. The government creates legal barriers through patents, copyrights, and granting exclusive rights to companies.
In some cases, the government will grant a person or firm exclusive rights to produce a good or service, enabling them to monopolize the market for this good or service. Intellectual property rights, including copyright and patents, are an important example of legal barriers that give rise to monopolies.
Copyright gives the creator of an original creative work such as a book, song, or film exclusive rights to it, usually for a limited time, with the intention of enabling the creator to be compensated for his or her work.
The intent behind copyright is to promote the creation of new works by providing creators the opportunity to profit from their works. The copyright holder receives the right to be credited for the work, to determine who may adapt the work to other forms, who may perform the work, and who may financially benefit from it, along with other related rights.
When the copyright on a work expires, the work is transferred to the public domain, enabling others to repurpose and build on the work. Copyright : Copyright is an example of a temporary legal monopoly granted to creators of original creative works. A patent is a limited property right the government gives inventors in exchange for their agreement to share the details of their invention with the public. During the term of the patent, the patent holder has the right to exclude others from making, using, or selling the patented invention.
The patent provides incentives 1 to invent in the first place, 2 to disclose the invention once it is made, 3 to make the necessary investments in research and development, production, and bringing the invention to market, and 4 to innovate by designing around or improving upon earlier patents. When a patent expires and the invention enters the public domain, others can build on the invention.
For example, when a pharmaceutical company first markets a drug, it is usually under a patent, and only the pharmaceutical company can sell it until the patent expires.
This allows the company to recoup the cost of developing this particular drug. They owned most of the diamond mines all over the world covering most of the African mines since 19th century, and they had become a single raw diamond seller since late 19th century to almost the beginning of the 21st century. They maintained their position as the largest owner of the raw diamonds through their various business strategies, and that is how they ended up being the single largest seller of raw diamond and able to attain Monopoly status in the market for raw diamonds.
When Microsoft came up with an exceptionally user-friendly operating system during a time when very few user-friendly operating systems are available in the market, as a result of which they become a significant holder of this key resource. However, there are various operating systems available in the market such as Linux, Unix, but they are not as much user friendly as windows. As pharmaceutical company invests a lot of money in research to come up with new drug formulas or new compositions, as they are spending a lot of money for it and the end result may or may not bring any results to them which creates a vast sunk cost for the company.
What do you anticipate would happen to prices? Because of economies of scale, each firm would produce at a higher average cost than before. They would each have to build their own power lines. As a result, they would each have to raise prices to cover their higher costs. The policy would fail. If Congress reduced the period of patent protection from 20 years to 10 years, what would likely happen to the amount of private research and development?
Shorter patent protection would make innovation less lucrative, so the amount of research and development would likely decline. ALCOA does not have the monopoly power it once had. How do you suppose their barriers to entry were weakened? For many years, the Justice Department has tried to break up large firms like IBM, Microsoft, and most recently Google, on the grounds that their large market share made them essentially monopolies.
In a global market, where U. Intellectual property laws are intended to promote innovation, but some economists, such as Milton Friedman, have argued that such laws are not desirable. In the United States, there is no intellectual property protection for food recipes or for fashion designs. Considering the state of these two industries, and bearing in mind the discussion of the inefficiency of monopolies, can you think of any reasons why intellectual property laws might hinder innovation in some cases?
Return to Figure. Suppose a new firm with the same LRAC curve as the incumbent tries to break into the market by selling 4, units of output. If the incumbent continues to produce 6, units, how much output would the two firms supply to the market? Estimate what would happen to the market price as a result of the supply of both the incumbent firm and the new entrant.
Approximately how much profit would each firm earn? Skip to content Monopoly. Learning Objectives By the end of this section, you will be able to: Distinguish between a natural monopoly and a legal monopoly. Explain how economies of scale and the control of natural resources led to the necessary formation of legal monopolies Analyze the importance of trademarks and patents in promoting innovation Identify examples of predatory pricing.
Natural Monopoly Economies of scale can combine with the size of the market to limit competition. Economies of Scale and Natural Monopoly. In this market, the demand curve intersects the long-run average cost LRAC curve at its downward-sloping part.
A natural monopoly occurs when the quantity demanded is less than the minimum quantity it takes to be at the bottom of the long-run average cost curve. Control of a Physical Resource Another type of natural monopoly occurs when a company has control of a scarce physical resource.
Legal Monopoly For some products, the government erects barriers to entry by prohibiting or limiting competition. Promoting Innovation Innovation takes time and resources to achieve. Intimidating Potential Competition Businesses have developed a number of schemes for creating barriers to entry by deterring potential competitors from entering the market.
Summing Up Barriers to Entry Figure lists the barriers to entry that we have discussed. Example Natural monopoly Government often responds with regulation or ownership Water and electric companies Control of a physical resource No DeBeers for diamonds Legal monopoly Yes Post office, past regulation of airlines and trucking Patent, trademark, and copyright Yes, through protection of intellectual property New drugs or software Intimidating potential competitors Somewhat Predatory pricing; well-known brand names.
Key Concepts and Summary Barriers to entry prevent or discourage competitors from entering the market. Self-Check Questions Classify the following as a government-enforced barrier to entry, a barrier to entry that is not government-enforced, or a situation that does not involve a barrier to entry.
A patented invention A popular but easily copied restaurant recipe An industry where economies of scale are very small compared to the size of demand in the market A well-established reputation for slashing prices in response to new entry A well-respected brand name that has been carefully built up over many years.
A patent is a government-enforced barrier to entry. This is not a barrier to entry. This is a barrier to entry, but it is not government-enforced.
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