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By the end of this section, you will be able to:

  • Distinguish between a natural monopoly and a legal monopoly.
  • Explain how economies of scale and the control of natural resources led to the necessary formation of legal monopolies
  • Analyze the importance of trademarks and patents in promoting innovation
  • Identify examples of predatory pricing

Because of the lack of competition, monopolies tend to earn significant economic profits. These profits should attract vigorous competition as described in Perfect Competition , and yet, because of one particular characteristic of monopoly, they do not. Barriers to entry are the legal, technological, or market forces that discourage or prevent potential competitors from entering a market. Barriers to entry can range from the simple and easily surmountable, such as the cost of renting retail space, to the extremely restrictive. For example, there are a finite number of radio frequencies available for broadcasting. Once the rights to all of them have been purchased, no new competitors can enter the market.

In some cases, barriers to entry may lead to monopoly. In other cases, they may limit competition to a few firms. Barriers may block entry even if the firm or firms currently in the market are earning profits. Thus, in markets with significant barriers to entry, it is not true that abnormally high profits will attract new firms, and that this entry of new firms will eventually cause the price to decline so that surviving firms earn only a normal level of profit in the long run.

There are two types of monopoly, based on the types of barriers to entry they exploit. One is natural monopoly    , where the barriers to entry are something other than legal prohibition. The other is legal monopoly    , where laws prohibit (or severely limit) competition.

Natural monopoly

Economies of scale can combine with the size of the market to limit competition. (This theme was introduced in Cost and Industry Structure ). [link] presents a long-run average cost curve for the airplane manufacturing industry. It shows economies of scale up to an output of 8,000 planes per year and a price of P 0 , then constant returns to scale from 8,000 to 20,000 planes per year, and diseconomies of scale at a quantity of production greater than 20,000 planes per year.

Now consider the market demand curve in the diagram, which intersects the long-run average cost (LRAC) curve at an output level of 6,000 planes per year and at a price P 1 , which is higher than P 0 . In this situation, the market has room for only one producer. If a second firm attempts to enter the market at a smaller size, say by producing a quantity of 4,000 planes, then its average costs will be higher than the existing firm, and it will be unable to compete. If the second firm attempts to enter the market at a larger size, like 8,000 planes per year, then it could produce at a lower average cost—but it could not sell all 8,000 planes that it produced because of insufficient demand in the market.

Economies of scale and natural monopoly

The graph represents a natural monopoly as evidenced by the demand curve intersecting with the downward-sloping part of the LRAC curve.
In this market, the demand curve intersects the long-run average cost (LRAC) curve at its downward-sloping part. A natural monopoly occurs when the quantity demanded is less than the minimum quantity it takes to be at the bottom of the long-run average cost curve.

Questions & Answers

what is implicit cost
fuseini Reply
The links don't seem to be working
Scorch Reply
what is taxonomy
wise Reply
how to interprets elasticity
Joseph Reply
what is demand curve
It is the graphical representation of quantity demand of a commodity?
it is the graphical representation of price and quantity demanded of a commodity
what is the difference between positive economics and normative economics.
pauline Reply
It said that positive economics studies the facts, but normative one focus on ought to be.
in another words normative economics focuses on what the fair situation is.
positive economics: wages are 10$ per hour. normative economics: wages should be 25$ per hour.
what is choice
Hamis Reply
what is indifference curve
Misba Reply
It is an alternative combination of consumption of two goods which gives equal level of satisfaction.
good morning guys.. I am Lawrence from Nigeria.. trust am welcome here..
Lawrence Reply
Lovely morning bro... Welcome 💕
ur most welcome lawrence
Welcome back to another session,happy Friday morning
good morning guys I'm Oumar Kromah from Côte d'ivoire am I welcome here
lovely morning bro welcome
i dont understand on economics
i m from pakistan
I am from Nepal
i m Pakistan
Am Gabriel from Ghana
are you ecnomist?
Am Eben Paak from Ghana
Okay.. Nice meeting us
l am James Borbor from Liberia
I am a researcher
you all are ecnomost
ohh nice
re search on economy
what is demand
Milton Reply
Link seems to not work
Jayden Reply
what is an opportunity cost?
Azotikemah Reply
next best alternative cost...
Meaning of Economics
Kamara Reply
It can be define as the practical science that studies human relationship between End's and scare means which have alternative uses in all aspect of human life
what's the meaning of pure and impure
Pure is free from immoral behavior or quality,Impure not clean dirty,filthy containing something that is in pure
what is economics
Malak Reply
Economics is a social science which deals with humans behavior
Explain two reasons why trade union membership may decline in a country
Pop Reply
analyse the factors that influence the strength of a trade union.
discuss whether or not trade unions benefit workers
nice questions guys
Firstly, to what extent is it willing to backup an employee or worker Secondly , is it effective in sustaining a valid point
what is demand
what's the difference between elastic and inelastic
The desire to purchase goods and services at a particular price
Elastic: demand is price sensitive. Inelastic: demand is not price sensitive.

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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