of substitutes). For instance, the price of a unique item at auction is deter-
mined by what the market will bear, not by competitive supply. The best-known
examples of monopoly power based on resource control include French cham-
pagne, De Beers (diamonds), and OPEC (crude oil).PATENTS, COPYRIGHTS, AND OTHER LEGAL BARRIERS A patent grants the
holder exclusive rights to make, use, or sell an invention for 20 years. A patent
can apply to an idea, process, or system as well as to an invention. A copyright
prohibits the unauthorized copying of a particular work. (Currently, there is
considerable controversy concerning whether computer software qualifies for
copyright protection.) Patents and copyrights constitute important barriers to
entry in computers, machinery, electronics, publishing, pharmaceuticals,
defense, and chemicals. In many instances (local utilities, cable television firms,
vendors on state highways and in national parks), the government grants legal
monopolies for extended periods of time.STRATEGIC BARRIERS Finally, the dominant firm (or firms) may take actions
explicitly aimed at erecting entry barriers. Securing legal protection (via patent
or copyright) is only one example. A monopolist may exercise limit pricing,
that is, keep price below monopoly levels to discourage new entry. It may
threaten retaliatory pricing. For the same reasons, it may engage in extensive
advertising and brand proliferation, not because this is profitable in itself (it
may not be) but to raise the cost of entry for new competitors. Finally, the
monopolist may intentionally create excess productive capacity as a warning
that it can quickly expand output should a new firm attempt to enter. We will
reexamine strategic barriers in Chapter 10.Intel Corporationis by far the most powerful and profitable producer of
microchips in the world. In the early 1970s, Intel invented the microprocessor,
the computer on a chip that serves as the “brain” of the personal computer.
Since then, it has produced numerous generations of chips, including the
Pentium series and more recently the Itanium series, each faster and cheaper
than the last. At the close of 2010, it accounted for 81 percent of the world’s
semiconductor market, a share mainly unchanged over the past decades. In
advanced microprocessors, its market dominance is well over 90 percent. Thus,
Intel has held a virtual monopoly in the microchip market.^1
Over the years, however, new competitors have increasingly pushed into
Intel’s markets. In the mid-1990s, other chips emerged as competitors in par-
ticular market segments: the Power PC chip shared by IBM, Motorola, and
Apple, Hewlett-Packard’s RISC chip, and Sun’s SPARC chip, to name a few.324 Chapter 8 MonopolyIntel’s
Monopoly(^1) This account is drawn from industry reports and J. Markoff, “Intel increases Transistor Speed by
Building Upward,” The New York Times(May 5, 2011), p. B2; R. Winkler, “Getting an ARM up on
Intel,” The Wall Street Journal(March 17, 2011): B5; and “The End of Wintel,” The Economist(July
31, 2010), pp. 53–54.
c08Monopoly.qxd 9/29/11 1:31 PM Page 324