Types of Monopolies

• Natural monopoly: the most efficient scale is so large that a single firm dominates the market.

• Patents, copyrights, licenses: government protection of a firm’s right to produce a unique product.

• Entry barriers: economic and legal restrictions that make entry more difficult for new competitors than for the existing monopoly firm.

Exercise 39. Study the characteristics given. Do they belong to one type of market structure? Why?

• characteristics:

– One seller (one buyer)

– Unique goods

– Blocked entry and exit

– Monopoly sets price (price maker)

– Monopoly has better information than buyers (sellers)

– Profitable even if not efficient

– Success depends on:

– Barriers to entry

– Closeness of substitutes

–Transportation costs may be an issue

2. Practice in economic analysis

Exercise 40. What kind of monopoly does the diamond market create? What kind of barrier is it based upon?

The Diamond Market

Geologically diamonds are more common than any other gem-quality colored stone. But if you price them, they seem a lot rarer, why? Diamonds are rare because The De Beers Company, the world’s main supplier of diamonds, makes them rare. The company controls most of the worlds diamond mines and limits the quantity of diamonds supplied to the market.

The De Beers monopoly of South Africa was created in the 1880s by Cecil Rhodes, a British businessman. In 1880 mines in South Africa dominated the world’s supply of diamonds. There were many producers until Rhodes bought them up. By 1889 De Beers controlled almost all the world’s diamond production. Since then large diamond deposits have been discovered in other African countries, Russia, Australia, and India. De Beers has either bought out new producers or entered into agreements with local governments For example, all Russian diamonds are marketed through De Beers.

buy up – скупать

Exercise 41. Read the text, answer the question. Why has Microsoft created a natural monopoly, what are the advantages of a natural monopoly?

An economic analysis of open source

In the world of PC-based software, Microsoft enjoys what economists call a “natural monopoly.” This natural monopoly has occurred as a result of several factors, including barriers to market entry (such as the cost and inconvenience for existing customers to switch operating systems) and barriers to competition (such as patents and proprietary source-code control).

Microsoft’s natural monopoly has also been sustained by a basic law of software economics: as a vendor’s business grows, the average cost of reproducing its software decreases. With downloadable software, vendors can produce virtually unlimited copies of their software, and each download reduces the unit cost for producing that software. At the same time, each unit downloaded increases the barrier to competition.

This situation creates strong momentum for the monopoly holder – only as long as it is competing against other companies that follow the same business model. In the open-source community, today’s software vendors are facing a competitor that has no stock, no owner, no board of directors – a competitor they cannot buy, and one they can’t attack in a price war because the competitor’s products already sell for nothing. It is predictable that in such a market there will be one winner.

vendor –торговец, продающий товар вразнос; уличный автомат

Study question:

How do technological changes influence the natural monopoly?