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

Pass Go…Collect $200 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

C o s t p e r u n i t Quantity per period $ Long-run average cost 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.