Pure Monopoly 323cheaper for one company to lay a single network of cables to provide cable TV
to a particular town or region.CAPITAL REQUIREMENTS In some industries (automobiles, defense, oil
refining, deep-sea drilling), the capital requirements of production are enor-
mous. In others (chemicals, pharmaceuticals, electronics), large investments in
research and development are necessary. When large sunk costs are required,
entry is particularly risky. (If, after entry, a firm finds itself suffering losses, it
will be largely unable to recover its investment.)PURE QUALITY AND COST ADVANTAGES Sometimes a single firm has
absolute quality or cost advantages over all potential competitors. Cost advan-
tages may be due to superior technology, more efficient management,
economies of scope, or learning. For these reasons, Intel dominates the mar-
ket for microchips, Wal-Mart is the world’s leading chain of discount depart-
ment stores, and Boeing and Airbus share the global aircraft market. In many
e-commerce markets, network externalities (making larger networks more valu-
able to customers) bestow an important quality advantage on the market leader
(eBay in online auctions for instance). Although there are many close substi-
tutes, Coca-Cola continues to guard the secret for its best-selling soft drink. In
the 1980s and 1990s, the Department of Defense used sole-source procure-
ments to purchase major weapon systems, claiming that only a single qualified
supplier existed. A dramatic expression of the monetary return to “being the
best” is the annual income of a “superstar” such as Tiger Woods, Kobe Bryant,
Lady Gaga, George Clooney, or Angelina Jolie.PRODUCT DIFFERENTIATION Once an incumbent has created a preference
for a unique product or brand name via advertising and marketing campaigns,
it has erected considerable barriers to new entrants that seek to compete for its
customers. Producers of retail goods and services thrive on product differen-
tiation, real or perceived. Differentiation is the norm in products ranging from
soft drinks to ready-to-eat breakfast cereals to toothpaste. Switching costscan be
an important barrier to competition in markets for information-intensive goods
and services. When customers have invested in learning to use a particular soft-
ware program, navigate a Web site, or set up online accounts, they are less likely
to switch to competitive (perhaps even superior) alternatives. Google’s con-
tinuing dominance in Internet search depends in part on the high learning
costs of changing to an alternative search engine.CONTROL OF RESOURCES A barrier to entry exists when an incumbent firm
(or firms) controls crucial resources—mineral deposits, oil supplies, even scien-
tific talent. At the local level, a retailer’s choice location may provide protection
from entry by would-be competitors. Ownership of unique items (fine art,
antiques) confers a degree of monopoly power (albeit limited by theavailabilityc08Monopoly.qxd 9/29/11 1:31 PM Page 323