• 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

• The two types of monopolies that exist are the natural monopoly and the government protected monopoly.

• 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

• 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

• 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

• A monopoly sometimes emerges naturally when a firm experiences economies of scale as reflected by the downward-sloping, longrun 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

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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.
Quantity per period
Long-run average cost

• 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.

• 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 longterm 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

• 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

• 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.