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A monopoly is a market characterized by a single seller of a good with no close substitutes and barriers to entry. Monopolies rarely occur in a pure form. There are almost always substitutes or methods of possible entry into a market. When the term “monopoly” is used it is usually referring to a degree of monopoly or market power. In many cases the existence of a monopoly results in regulation or the enforcement of antitrust laws that attempt to introduce competition to reduce market power.

The definition of monopoly requires a judgment about the phrase “no close substitutes” and what “barriers to entry” mean. I might be the only producer of mink lined, titanium trash cans. This is not relevant as a monopoly since there are many good substitutes; plastic or steel containers or even brown paper bags will serve as trash containers. There are substitutes for the electricity (KWH) produced by a public utility. It is possible to purchase a portable generator powered by an internal combustion engine or use candles for use in your home.

However, neither of these can be regarded as a close substitute. The concept of cross elasticity of demand can be used to identify whether two goods are substitutes on not.

Barriers to entry are another important characteristic of monopoly. Complete barriers to entry (BTE) make it impossible for competing firms to inter a market. However, in n most cases, BTE are not complete but are relative. Firms’ entry into a market can be restricted by a variety of factors. BTE’s can be due to:

1. The ownership of a key resource or location maybe important. ALCOA’s monopoly in aluminum was at first due to a patent on a low cost process to reduce bauxite into aluminum. After the patent expired, their ownership of bauxite reserves allowed them to maintain their monopoly position. In earlier times there may have been only one location on a river where a dam could be built to power a gristmill. A movie theatre gains monopoly power over its sale of popcorn by prohibiting customers bringing their own food into the theatre.

2. Information or knowledge not available to others. (Industrial secrets). Knowledge about a process may kept secret (rather than using a patent since patent information is publicly available).

3. Legal barriers such as license, franchise, patent, copyright, etc. ALCOA’s monopoly began when the government gave them a patent on a low cost method of reducing bauxite to aluminum. Other methods of making aluminum are possible but cannot compete with the method pioneered and patented by ALCOA. A State park might license a firm to provide prepared foods within the boundary of the park. This would confer market power on the firm unless their price was regulated. A city that licenses a taxi company gives them market power. They may license several taxi companies so that there is some competition and or they may regulate the services and rates. Public utilities often have a license to operate in a specific area. In return for this monopoly power, they are subject to regulation. In fact, the British colonies that became the United States and Canada were the result or grants from the British government. Hudson Bay Company and the East India Companies were firms that were granted rights to operate in specific areas.

4. Natural monopoly caused by economies of scale usually associated with a cost structure with a high fixed cost relative to variable costs. A natural monopoly is the result of significant economies of scale due to a high fixed cost. As the output increases the LRAC falls. If the market demand intersects the LRAC as it falls (or at its minimum), a natural monopoly

exists.

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