Why do governments allow monopolies

Governments do not condemn or encourage a certain company to dominate a market. The whole reason there has been little to no regulations for tech firms is to allow them to grow faster in an open environment and stimulate growth through limitless innovation. However, tech firms are now valued so high that many of them are currently one of the largest in the world and there is no reason governments should not begin to enforce regulations against both monopoly and monopsony power, as well as regulations focused on protecting and limiting the use of user data.

Monopolies create many problems for both the society and economy. Monopolies eliminate and control competition, which increases prices for consumers and limits the options they have. Market entrants have not yet achieved economies of scale, so their output simply costs so much more than the incumbent firms that market entry is difficult. The use of a product by other people can increase its value to a person. One example is Microsoft spreadsheet and word processing software, which is still used widely.

This is because when a person uses software that is used by so many others, he or she is less likely to run into compatibility problems in the course of work or other activities. This tendency to use what everyone else is using makes it difficult for new companies to develop and sell competing software. Legal rights can provide an opportunity to monopolize a market for a good.

Intellectual property rights, such as patents and copyright, give the rights holder exclusive control over the production and sale of certain goods. Property rights may give a company exclusive control of the materials necessary to produce a good.

The granting of permits or professional licenses can also favor certain firms, while setting standards that are difficult for new firms to meet. There are cases in which a government agency is the sole provider of a particular good or service and competition is prohibited by law. For example, in many countries, the postal system is run by the government with competition forbidden by law in some or all services.

Government monopolies in public utilities, telecommunications systems, and railroads have also historically been common. In other instances, the government may be an invested partner in a monopoly rather than a sole owner. This will still make it difficult for competitors to operate on equal footing.

Privacy Policy. Skip to main content. Search for:. Barriers to Entry: Reasons for Monopolies to Exist. Resource Control Control over a natural resource that is critical to the production of a final good is one source of monopoly power. Learning Objectives Explain the relationship between resource control and monopolies. Key Takeaways Key Points Single ownership over a resource gives the owner the power to raise the market price of a good over marginal cost without losing customers to competitors.

De Beers is a classic example of a monopoly based on a natural resource. De Beers had a lot of market power in the world market for diamonds over the course of the 20th century, keeping the price of diamonds high.

Key Terms market power : The ability of a firm to profitably raise the market price of a good or service over marginal cost. A firm with total market power can raise prices without losing any customers to competitors. Economies of Scale and Network Externalities Economies of scale and network externalities discourage potential competitors from entering a market. Learning Objectives Define Economies of Scale.

Key Takeaways Key Points Economies of scale are cost advantages that large firms gain because of their size. Natural monopolies arise as a result of economies of scale. Natural monopolies have overwhelming cost advantages over potential competitors. Network effects occur when the value of a good or service increases because many other people are using it. This makes competing goods or services with lower levels of adoption unattractive to new customers.

Key Terms economies of scale : The characteristics of a production process in which an increase in the scale of the firm causes a decrease in the long run average cost of each unit.

Network externalities : Are evident when the value of a product or service is dependent on the number of other people using it. Natural monopoly : Occurs when a firm is able to serve the entire market demand at a lower cost than any combination of two or more smaller, more specialized firms. Government Action There are two types of government-initiated monopoly: a government monopoly and a government-granted monopoly. Learning Objectives Discuss different types of monopolies initiated by government.

The large airline immediately slashes prices on this route to the bone, so that the new entrant cannot make any money. After the new entrant has gone out of business, the incumbent firm can raise prices again. After this pattern is repeated once or twice, potential new entrants may decide that it is not wise to try to compete. Small airlines often accuse larger airlines of predatory pricing: in the early s, for example, ValuJet accused Delta of predatory pricing, Frontier accused United, and Reno Air accused Northwest.

In , the Justice Department ruled against American Express and Mastercard for imposing restrictions on retailers who encouraged customers to use lower swipe fees on credit transactions. In some cases, large advertising budgets can also act as a way of discouraging the competition. If the only way to launch a successful new national cola drink is to spend more than the promotional budgets of Coca-Cola and Pepsi Cola, not too many companies will try.

A firmly established brand name can be difficult to dislodge. Table 1 lists the barriers to entry that have been discussed here. This list is not exhaustive, since firms have proved to be highly creative in inventing business practices that discourage competition. When barriers to entry exist, perfect competition is no longer a reasonable description of how an industry works.

When barriers to entry are high enough, monopoly can result. Barriers to entry prevent or discourage competitors from entering the market. These barriers include: economies of scale that lead to natural monopoly; control of a physical resource; legal restrictions on competition; patent, trademark and copyright protection; and practices to intimidate the competition like predatory pricing.

Intellectual property refers to legally guaranteed ownership of an idea, rather than a physical item. The laws that protect intellectual property include patents, copyrights, trademarks, and trade secrets.

A natural monopoly arises when economies of scale persist over a large enough range of output that if one firm supplies the entire market, no other firm can enter without facing a cost disadvantage. Return to Figure 1. Suppose a new firm with the same LRAC curve as the incumbent tries to break into the market by selling 4, units of output. If the incumbent continues to produce 6, units, how much output would be supplied to the market by the two firms?

Estimate what would happen to the market price as a result of the supply of both the incumbent firm and the new entrant. Approximately how much profit would each firm earn? Skip to content Chapter 9. Learning Objectives 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.

Self-Check Questions Classify the following as a government-enforced barrier to entry, a barrier to entry that is not government-enforced, or a situation that does not involve a barrier to entry. A patented invention A popular but easily copied restaurant recipe An industry where economies of scale are very small compared to the size of demand in the market A well-established reputation for slashing prices in response to new entry A well-respected brand name that has been carefully built up over many years Classify the following as a government-enforced barrier to entry, a barrier to entry that is not government-enforced, or a situation that does not involve a barrier to entry.

A city passes a law on how many licenses it will issue for taxicabs A city passes a law that all taxicab drivers must pass a driving safety test and have insurance A well-known trademark Owning a spring that offers very pure water An industry where economies of scale are very large compared to the size of demand in the market Suppose the local electrical utility, a legal monopoly based on economies of scale, was split into four firms of equal size, with the idea that eliminating the monopoly would promote competitive pricing of electricity.

What do you anticipate would happen to prices? If Congress reduced the period of patent protection from 20 years to 10 years, what would likely happen to the amount of private research and development? Review Questions How is monopoly different from perfect competition? What is a barrier to entry? Give some examples. A monopoly is a case where there is only one firm in the market. We will define and model this case and explain why market power is good for the firm, bad for consumers.

We will also show that society as a whole suffers from the lack of competition. Microeconomics: When Markets Fail. Enroll for Free. This Course Video Transcript.