Entering A Monopoly Market

Monopolies are unquestionably the most difficult market structure to get in. Essentially, a monopoly is a market with only one seller of a good without any close substitutes. This term should not be confused with monopsony, which is one buyer of labor services in a labor market. Monopolies have very high concentration, as one firm usually controls the market. So, if you are that firm, then you are the market. Why? Because, again, there is no other reasonable substitutes that the competitor can provide and also because a firm wanting to enter that market can actually have their entry blocked, which brings us to entry and exit. Let us start out with the legal barriers. With legal barriers, there are laws that prevent other firms from entering the market to sell a product. Examples of this could include the fact that the United States Postal Service can only deliver first class mail. Or that in some jurisdictions, only alcohol can be sold by government-run corporations. All of these are legal barriers. To show its natural barriers to entry, this can mean that other firms simply cannot afford to enter the market, as start-up costs are just way too high or the cost structure of market can be advantageous to the largest firm. Companies like Southern California Edison – and most public utilities in general – would fall into this category, and would be called natural monopolies. In regards to the types of products that we see in monopolies, it is unique because it is the only product of its kind. There are no close substitutes. Because of this, the price setting behavior is that they are price makers. The firm thus faces a downward sloping demand curve. The rules for profit maximization for a monopoly remains the same as every other firm: produce at the point where marginal revenue equals marginal cost. When finding its profit-maximizing price and quantity, the monopoly firm will calculate the marginal revenue at different quantities. Usually under monopoly, the quantity that will be supplied at any particular price is contingent on demand. The more elastic demand leads to a lower profit-maximizing price at the quantity. Usually, the result tends to be different prices that are associated with the same quantity, depending on demand. In its non-price competition, we can see it with image advertising. Just take a walk down Times Square and you will really see it, with billboards and the like. Examples of these companies can include your local cable TV companies, or your local water company. To show how they are monopolistic, one needn’t look further than your local water company. Let's say you buy a house and there are still fees from the previous owner on their water bill. Guess what? You have to pay them now... don't like it? Then you can't have your water turned on. Because of the water company being a monopoly (amongst other things, I’m sure…), there was no other choice, unless you did not want the water turned on. Other monopolies can also include Microsoft, as they have a dominant share of the computer market.

Private Monopoly


• Maximise their profit by pricing above cost (at
point where Marginal Revenue = MC)
– point of maximum allocative inefficiency
• incentive to reduce costs depends on the
‘contestability’ of the monopoly
– public monopolies not contestable
• Other market structures
– cartels try to act like a monopolist
– Many believe the degree of competition is related to
the number of firms (not always true)

Natural monopoly

– industry where industry average costs are minimised
when there is one firm
• interaction of scale economies and demand
• usually occurs when have high fixed costs relative to
variable costs (most networks)
– Creates conflict between productive and allocative
efficiency
• productive efficiency requires a single firm
• a single firm will price like a monopoly causing allocative
inefficiency

Why is competition important?

• Low-powered incentive schemes motivated by
information asymmetry and desire to limit
excessive profits (rents)
• Competition reduces the information asymmetry
and permits higher-powered incentives at lower
rent cost
– other firms have same cost and cost reduction
information so can undercut each other if price
above cost

• Rationale for introducing competition where no
natural monopoly in the industry