Main characteristics 1 One seller 2 High barriers to entry for a number of reasons other firms are prevented from entering the market some reasons given below under three main 3 Monopolist has all market power it can ignore the equilibrium price and dictate the price the Introduction to Monopoly Markets Overview price the demand and supply Three main sources of monopolies 1 Monopoly resources 2 Government regulation 3 Production process natural monopolies The key difference between a perfectly competitive market and a monopoly is that the firm in the monopoly has market power That is a firm in perfect competition can decide the quantity it produces but has to accept the equilibrium price determined by the market however a monopoly can determine both the quantity and price of its product Also its demand curve is the market demand curve normal downward sloping The goal of a monopoly is to sell a high quantity at a high price higher than the market equilibrium Although it can determine the price the quantity demanded the amount they are able to sell will still be determined by the market equilibrium if it produces a higher quantity there will be a surplus 1 This is why profit maximizing monopolies can be damaging when producing a necessity good like electricity gasoline or Internet access 2 When more is supplied than demanded Puts downward pressure on prices but monopoly can 1 decide to either lower price or lower production Do not confuse with consumer surplus or producer surplus Such a market could work if regulations are in place or if monopoly is not pro t maximizing 2 see examples in section on natural monopolies Three main sources of monopolies 1 Monopoly resources When the resources necessary to produce a good belong to only one firm Mankiw gives the example of DeBeers a South African company that managed to control up to 80 of the world s diamond production As you might imagine it is rare for monopolies to emerge for this reason because it is very difficult to reach that level of control in a global market However you might imagine how long ago it wouldn t be that difficult for a single person or family to control all of the mining or clean water in a small region or village 2 Government regulation When the government grants a firm exclusive rights to sell a good or service It might not be immediately obvious but the most common examples of this are patents and copyright If you invent something new or create a piece of art the government can grant you a monopoly on the right to sell your creation You can see this as a way to give intellectual property the same protection as other types of capital If you knew that anyone could come and snatch your crops or steal oil from your land you would have no incentive to work your fields or explore for petroleum By granting this monopoly the government gives firms and individuals an incentive to invest in research and creativity 3 3 Production process natural monopolies if more firms were introduced This happens when a single firm can make the market more efficient keep costs lower than To see is a firm is a natural monopoly we can look at the average total cost If it gets consistently lower as quantity increases then the firm is a natural monopoly Think of how if more firms entered the market each would have to produce less quantity than a monopoly so the ATC would be higher for each of them and the sum of their total costs would also be higher than that of a monopoly This is an example of an economy of scale Most government created and natural monopolies have something to do with economies of scale or utilities necessity goods because they want to subsidize the good or just minimize fixed costs namely of infrastructure In fact the word monopoly comes from the ancient Greek mono for single and 3 poleo for sell or barter which already meant an exclusive right to sale given by the government or throne These sources of monopolies as Mankiw calls them are not mutually exclusive and often they are all factors in why a monopoly exists Think of the following examples Telecommunications and transportation Originally AT T was the only company in the US that provided telephone service This monopoly was approved by the government because it was thought that it was the only efficient way of providing this service imagine of all the cost of building the infrastructure that is needed and what a waste it would be for each firm to invest in its own set of telephone poles wires operators etc The fixed cost was incredibly large compared to the marginal cost of connecting one more customer Later it was feasible to have several competitors and the government forced AT T to divest into smaller Regional Bell Operating Companies and one other company to handle long distance Also in many countries there is a monopoly for train tracks for a similar reason It would be ridiculous for several companies to each build tracks along the same routes and then compete In both cases monopolies are both natural and government enforced Oil In some countries like Mexico all petroleum property of the state and gas can only be sold by a public monopoly This in theory reduces the total fixed costs of exploration refining transportation etc that several companies would have to incur This is an example of a monopoly that is Government created owns all of the necessary natural resources and is purportedly a natural monopoly