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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

Because of the lack of competition, monopolies tend to earn significant economic profits. These profits should attract vigorous competition as described in Perfect Competition , and yet, because of one particular characteristic of monopoly, they do not. Barriers to entry are the legal, technological, or market forces that discourage or prevent potential competitors from entering a market. Barriers to entry can range from the simple and easily surmountable, such as the cost of renting retail space, to the extremely restrictive. For example, there are a finite number of radio frequencies available for broadcasting. Once the rights to all of them have been purchased, no new competitors can enter the market.

In some cases, barriers to entry may lead to monopoly. In other cases, they may limit competition to a few firms. Barriers may block entry even if the firm or firms currently in the market are earning profits. Thus, in markets with significant barriers to entry, it is not true that abnormally high profits will attract new firms, and that this entry of new firms will eventually cause the price to decline so that surviving firms earn only a normal level of profit in the long run.

There are two types of monopoly, based on the types of barriers to entry they exploit. One is natural monopoly    , where the barriers to entry are something other than legal prohibition. The other is legal monopoly    , where laws prohibit (or severely limit) competition.

Natural monopoly

Economies of scale can combine with the size of the market to limit competition. (This theme was introduced in Cost and Industry Structure ). [link] presents a long-run average cost curve for the airplane manufacturing industry. It shows economies of scale up to an output of 8,000 planes per year and a price of P 0 , then constant returns to scale from 8,000 to 20,000 planes per year, and diseconomies of scale at a quantity of production greater than 20,000 planes per year.

Now consider the market demand curve in the diagram, which intersects the long-run average cost (LRAC) curve at an output level of 6,000 planes per year and at a price P 1 , which is higher than P 0 . In this situation, the market has room for only one producer. If a second firm attempts to enter the market at a smaller size, say by producing a quantity of 4,000 planes, then its average costs will be higher than the existing firm, and it will be unable to compete. If the second firm attempts to enter the market at a larger size, like 8,000 planes per year, then it could produce at a lower average cost—but it could not sell all 8,000 planes that it produced because of insufficient demand in the market.

Economies of scale and natural monopoly

The graph represents a natural monopoly as evidenced by the demand curve intersecting with the downward-sloping part of the LRAC curve.
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.

Questions & Answers

who gave the concept of perfect competition in economics?
Sandeep Reply
 Léon Walras gave the first definition of perfect competition   
ADITYA
no, it was me😂
Nancy
What is Indifference curve?
Ch
Perfect competition is an idealized market structure that achieves an efficient allocation of resources.
Daauud
what are the conditions for determining the nature of goods in partial differentiation
Unique
what is economics
Arman Reply
is a science which study human behaviour as relationship between ends and scarce means hav altenative uses
Herieth
what are the other factors of demand
Aysher Reply
what are other factors in demand
Aysher
What is price elasticity of demand
Ghulam Reply
ok
debashis
what makes a country to be operating within the PPC
The Reply
two different product that are being are being produced efficiently
Othusitse
what is quartile
sukhdeep Reply
quartile occurs as a numerical probabilistic aspect such as quartile 1,2 or 3.
Othusitse
what will happen ifvwe will increase the price
Harleen Reply
due to increase the price the demand redeuce to related product
abdullah
the higher the price leads to low quantity to be demanded
Herieth
what is demand change
George
When price of any commodity change than demand is automatically change. Prince and demand have direct relationship.
Ch
what is long run?
Cabdulahi Reply
what will be the price
Harleen Reply
how the price determined in oligopoly?
Sahil Reply
what are the main problems in the market!?
Baby Reply
Price effect is a combination of income and substitution effect discuss
saroj Reply
Randy how IC energetic is superior to utilise energetic
saroj
why economics is undependent subject?
Yohanissy Reply
Why?
Ch
What's the scope of Economic?
Ch
What's Economic scope?
Ch
what is c.s p.s and market efficency
Raghu
what is scope of economics
Herieth Reply
Scope of economic?
Ch
it consist of *subject matter of economics *normative and positive *economics problem solving * science and arts
Herieth
A few days ago i get admission in MS.C economic. How i grip it?
Ch
in which university you take admission?
Shoaiq
I get admission in a acadme.And that is relevate with Peshawar university.
Ch
Pertinent bro
Muafue
Did anybody have Macroeconomic nd Microeconomic's'notes?
Ch
how economics is a particular kind of economising!?
Baby
i hav notes of microeconomics
Herieth
human touch has entirely missing(means wat as criticsm of robbin definition
Herieth
what is demand?
Cabdulahi
what is econamic goods and services
Yohanissy Reply
efinition of Goods & Services for Economics. Goods and services represent an important term in basic economics. Goods are tangible things that can be consumed, such as clothes and food. Services are actions people perform, such as haircuts or cleaning services.
Landing
Services can't be measured or weigh goods is tangible process
Racheal
What is a Martket?
Landing
Marketing : managing a profitable customer relationship.
Cabdulahi
market; a point where trade is made or an exchange: like buying and selling. An ice cream in exchange for a coin. Anywhere can be a market. That's how markets are established.
Christoef
Market : the set of actual and potential buyers of product or service.
Cabdulahi
what is demand ?
Cabdulahi
Is the Consumer desire and ability to purchase goods or services
Racheal
Demand refers to the desire to buy a commodity backed by willingness and ability to purchase that commodity at a given point of time. According to Prof RG Lipsey, “The amount of a commodity that households wish to purchase is called the quantity demanded of that commodity”
Landing

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Source:  OpenStax, Microeconomics. OpenStax CNX. Aug 03, 2014 Download for free at http://legacy.cnx.org/content/col11627/1.10
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