1. Copyright (c) 2000 by Harcourt, Inc. All rights reserved. Causes of Monopoly Barriers to entry which are factors that prevent new firms from entering a market are the source of all monopoly power. There are two general types of barriers to entry –Technical barriers –Legal barriers

2. Copyright (c) 2000 by Harcourt, Inc. All rights reserved. Technical Barriers to Entry Other technical barriers to entry. –Special knowledge of a low-cost method of production. –Ownership of a unique resource. –Possession of unique managerial talents.

3. Copyright (c) 2000 by Harcourt, Inc. All rights reserved. Legal Barriers to Entry Pure monopolies can be created by law. –The basic technology for a product can be assigned to only one firm through a patent. The rational is that it makes innovation profitable and encourages technical advancement. –The government can award an exclusive franchise or license to serve a market. This may make it possible to ensure quality standards

4. Copyright (c) 2000 by Harcourt, Inc. All rights reserved. APPLICATION 10.1: Entry Restriction by Licensing State governments license many occupations and impose penalties for those who run a business without a license. Specific examples include: –Dry Cleaning in California Prospective dry-cleaners must take a licensing exam which may require attending a school. Profits are higher than in other states. Existing firms are staunch defenders of the law.

5. Copyright (c) 2000 by Harcourt, Inc. All rights reserved. APPLICATION 10.1: Entry Restriction by Licensing –Liquor Stores Currently 16 states operate liquor-store monopolies. In 34 other states, liquor stores are licensed and subject to restrictions on pricing and advertising. –States with licenses have higher prices. –Existing owners are most stringent supporters. –Taxicabs Many cities limit number of taxicabs. In Toronto, prices are about 225 percent higher. New York city taxi medallions cost about $250,000.

6. Copyright (c) 2000 by Harcourt, Inc. All rights reserved. Monopoly Rents Monopoly rents are the profits a monopolist earns in the long run. –These profits are a return to the factor that forms the basis of the monopoly. Patent, favorable location, license, etc.. Others might be willing to pay up to the amount of this rent to operate the monopoly to obtain its profits.

7. Copyright (c) 2000 by Harcourt, Inc. All rights reserved. What’s Wrong with Monopoly Profitability –Monopoly power is the ability to raise price above marginal cost. –Profits are the difference between price and average cost. People may also be concerned that economic profits go to the wealthy.

8. Copyright (c) 2000 by Harcourt, Inc. All rights reserved. What’s Wrong with Monopoly Distortion of Resource Allocation –Monopolists restrict their production to maximize profits. Since price exceeds marginal cost, consumers are willing to pay more for extra output than it costs to produce it. –From societies point of view, output is too low as some mutually beneficial transactions are missed.