Market Structures, Perfect Competition, Monopoly, and Things Between ‹ 127
A decreasing cost industryis one in which the entry of new firms actually decreases
the price of key inputs and causes the cost curves to shift downward. This might occur
because producers of the key inputs expand production and experience economies of scale
and lower per unit costs. Since the entry of new firms lowers the price of the output and
decreases the cost curves, it takes longer for the profit to be eliminated than in our constant
cost industry. More firms can eventually enter this market, and the new long-run price is
lower than it would be in a constant cost industry.
9.2 Monopoly
Main Topics: Structural Characteristics of Monopoly, Monopoly Demand, Profit Maximization,
Efficiency Analysis, Price Discrimination
Structural Characteristics of Monopoly
Since monopoly is the very opposite of perfect competition in the range of market struc-
tures, we can expect that the structural characteristics are also quite different.
- A single producer. This is pretty self-explanatory, but a strict definition of monopoly
requires that there are no other firms in the industry.
- No close substitutes. Consumers cannot find a similar product in other markets.
- Barriers to entry. Perhaps the most important characteristic of monopoly is that there
exists something that prevents rival firms from entering the market to provide competi-
tion to the monopolist and choice to consumers.
- Market power. This is the result of the first three characteristics. With no competition
and barriers to entry, the unregulated monopolist has market power, or monopoly
price-setting ability.
Again, it is rare to find a firm that satisfies all of the characteristics of monopoly, but
the De Beers firm holds a near monopoly on global diamond production. The only gas sta-
tion or bank in a small town might also act as a local monopolist.
Barriers to Entry
If there were no barrier to entry, a monopolist earning positive economic profits would be
history and this chapter would be done. So before moving on to the behavior of monop-
oly, let’s talk a little more about this necessary condition for the existence of monopoly.
- Legal barriers. In your local television market, only one firm is given the right to broad-
cast on a specific frequency. There might be only one firm given the right to sell liquor
in a small community. There are patents, trademarks, and copyright laws to protect
inventions and intellectual property. In a move popular with 14-year-old boys every-
where, Carmen Electra was recently given the sole right to the Internet address bearing
her name. These legal protections do not provide for absolute monopoly for there are
often viable substitutes available to consumers.
- Economies of scale. In Chapter 8 this concept was introduced. As a firm grows larger in
the long run, average total costs fall, providing the larger firm a cost advantage over
smaller firms. If extensive economies of scale exist, an industry could evolve into one
with only one enormous producer. A natural monopolyis a case where economies of
scale are so extensive that it is less costly for one firm to supply the entire range of
demand. Power plants are a good example of natural monopoly within a local area.
- Control of key resources. If a firm controlled most of the available resources in the production
of a good, it would be very difficult for a competitor to enter the market. For example, if a
KEY IDEA
