How do monopolies happen?

  • The monopolist will earn positive long run profits
  • When firms in a market enjoy positive profits, new firms will enter until there are zero economic profits.
  • For a monopoly to persist, it must be that there exists some form of an entry barrier that prevents new firms from entering the market.
  1. Patents, copyrights, and trademarks
    • A new patented technology receives exclusive rights to be the only producer of the technology for up to 20 years.
    • Pharmaceuticals is the most common example of this.
  2. Natural Monopoly
    • Sometimes it is most efficient to only have a single supplier in a market. As a result, the firm with the lowest costs (or highest economies of scale) will remain while all other competition will be forced to exit.
    • This generally occurs when the monopolist sells an essential facility in the production process (e.g. tap water, city utilities, airports)
    • Natural monopolies generally have a few things in common:
      • Very high startup and fixed costs
      • Very high economies of scale
      • Often times, the good is viewed as a necessity
  3. Government Franchises
    • This allows the government to explicitly control who can enter into an industry (e.g. transportation services, liquor stores)