Economics / Unit 5: Market Structures and Competition
5.2 Monopoly
Notes
A monopoly is a market with a single seller of a product that has no close substitutes, protected by barriers to entry.
- Barriers to entry: control of a key resource, very high start-up costs, patents and copyrights, and government licenses.
- A natural monopoly occurs when one firm can supply the whole market at a lower cost than several firms could, such as water or electricity lines. Governments often regulate natural monopolies or run them as public utilities.
- A government monopoly exists by law, such as the U.S. Postal Service's control of first-class mail delivery to mailboxes.
- A patent gives an inventor the sole right to make and sell an invention for a limited time (generally 20 years from filing in the U.S.).
- A monopolist is a price maker. Compared with a competitive market, it usually produces less and charges a higher price.
- Price discrimination: charging different customers different prices for the same good, such as student and senior discounts.
Practice
A drug company holds a patent on a new medicine. This patent is an example of:
The patent legally prevents other firms from selling the same drug for a time.
Why is a city's water system often a natural monopoly?
One firm can serve everyone at a lower average cost, so competition would waste resources.
Compared with a perfectly competitive market, a monopoly usually:
Without competitors, a monopolist can restrict output and raise the price to increase profit.
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