Monopoly

Monopoly can be viewed as the opposite of perfect competition. Instead of many firms, there is only one: the monopolist. This has important conse­quences for both price setting and the quantity produced.

Barriers to Entry

Why do monopolies arise? There are many different reasons, but all of them have to do with barriers to entry in the market. The reasons for these barriers could be

• Structural.
There are properties of the market that automatically shut competitors out:

• Economies of scale.
If there are economies of scale, large-scale advantages, the size of the firm is crucial for average cost. A situation can then arise in which only one firm can recover its costs. This is called a natural monopoly and an example of this is rail­roads.

• Cost advantages.
If the monopolist has access to a cheaper way of producing the good, for instance if she has a patent on a cheap­er technology, she can push competitors out of the market.

•  Strategic limitations. The monopolist can create barriers to entry. An example is limit pricing, where the monopolist sets the price so low that it becomes unattractive for competitors to enter.

•  Political. The government may decide to grant a firm a monopoly in a certain market. A common example is for pharmaceutical goods.

•  Patents and exclusive rights. If a firm has a patent on a certain good, other firms are shut out during the life span of the patent. It is also possible to have exclusive right to extracting, for instance, oil or met­als.