Sources Of Monopoly Power

5 Key excerpts on "Sources Of Monopoly Power"

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  eBook - ePub

  Markets and Power

  The 21st Century Command Economy

  • Eric A. Schutz(Author)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  6 Right-wing economists would emphasize barriers created by the state. Patent rights, for example, while certainly important for stimulating technological development, eliminate or reduce the threat of potential rivals of the privileged firms for a time. A variety of other exclusive licenses, privileges, and noncompetitive contracts granted by the state have the same effect, even if most are ostensibly granted for valid reason in the public interest (e.g., in electric power production, sanitation, national defense contracting). Other less direct state policies have a similar effect as well—for example, tariff and other import barriers and export subsidies. Government is certainly a prime source of monopoly power wherever the latter exists.

  Yet even subtracting state interferences, other entry barriers in real-world markets are quite substantial enough to make the case. Consider some of the more important of these. First, exclusive or concentrated ownership of available necessary resources automatically rules out potential competitors. The Aluminum Company of America’s virtual monopolization of known bauxite (aluminum ore) deposits prior to World War II is merely one of the more extreme and better known cases, resolved at least somewhat in the public interest by a breakup of the firm into the three independent aluminum producers that now dominate the industry. Many dominant firms and oligopolies, like the aluminum industry today, have secured their positions against possible outside competitors precisely by concentrating the ownership of major resources in their own hands.

  Second, transport costs of product supplies may give firms regional monopoly power by eliminating or reducing customers’ access to other firms elsewhere. When firms in a market have scale economies

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  Intermediate Microeconomics and Its Application

  • Walter Nicholson, Christopher Snyder(Authors)
  • 2021(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  12-1 Causes of Monopoly The reason monopoly markets exist is that other firms find it unprofitable or impossible to enter the market. Barriers to entry are the source of all monopoly power. If other firms could enter the market, there would, by definition, no longer be a monopoly. There are two general types of barri-ers to entry: technical barriers and legal barriers. 12-1a Technical Barriers to Entry A primary technical barrier to entry is that the production of the good in question exhibits decreasing average cost over a wide range of output lev-els. That is, relatively large-scale firms are more efficient than small ones. In this situation, one firm finds it profitable to drive others out of the in-dustry by price cutting. Similarly, once a monopoly has been established, entry by other firms is difficult because any new firm must produce at low levels of output and therefore at high average costs. Because this barrier to entry arises naturally as a result of the technology of production, the mo-nopoly created is sometimes called a natural monopoly . The range of declining average costs for a natural monopoly need only be “large” relative to the market in question. Declining costs on some absolute scale are not necessary. For example, the manufacture of concrete does not ex-hibit declining average costs over a broad range of output when compared to a large national market. In any particular small town, however, declining aver-age costs may permit a concrete monopoly to be established. The high costs of transporting concrete tend to create local monopolies for this good. Another technical basis of monopoly is special knowledge of a low-cost method of production. In this case, the problem for the monopoly firm fear-ing entry by other firms is to keep this technique uniquely to itself. When matters of technology are involved, this may be extremely difficult, un-less the technology can be protected by a patent (discussed subsequently).

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  Beyond Competition

  Economics of Mergers and Monopoly Power

  • Thomas Karier(Author)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  The theorists of the 1930s were careful to distinguish between competition among firms within a market and competition from new entrants. The number of good substitutes within a market determined monopoly power while the potential for new entrants determined barriers to entry. According to this distinction monopoly power could coincide with either low barriers as in Chamberlin's theory, or high barriers as in Robinson's. The lesson drawn from comparing the two was that monopoly power had lasting value only when accompanied by barriers to entry.

  As early as 1934 Kaldor identified two entry barriers that could discourage potential entrants: scarce inputs and economies to scale. Kaldor successfully showed how these factors allowed firms with monopoly power to sustain long-run profitability. But many questions remained: what constitutes an entry barrier? How are barriers related to monopoly power? And what are the economic effects of barriers? Discussion of these questions could have rapidly degenerated into a quagmire of conflicting opinions if not for the exhaustive analysis provided in 1965 by Joe Bain in Barriers to New Competition.

  In order to understand Bain's definition of barriers to entry, it helps to recall a proposition of perfect competition: firms will be inclined to enter a market with free entry until profits are eliminated and prices equal average costs. It was a logical step then to define barriers to entry as "the extent to which established sellers persistently raise their prices above a competitive level [minimum average cost] without attracting new firms to enter the industry."31 One could quibble over numerous details but the basic premise is sound: barriers deter firms from entering an industry even when established firms are relatively profitable.

  Bain assigned barriers to one of three major categories: absolute advantage, product differentiation, and economies to scale. Established firms have absolute advantages when they have unique access to some factors essential for production. These factors can be industry-specific, such as a rare material input or production techniques protected by patents or secrets. In other cases it may be something as common as credit, which established firms can sometimes obtain with lower interest charges. In general, barriers exist whenever access to these elements are better or cheaper for established firms than for new entrants.

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  Antitrust Policy

  The Case for Repeal

  • D.T. Armentano(Author)
  • 1986(Publication Date)
  • Cato Institute

    (Publisher)

  Competition and Monopoly: Theory and Evidence Much of the support for antitrust policy depends upon the correctness of the standard theories of competition and monopoly. These can be briefly summarized as follows.

  The Theories

  Some economists define "competition" as a state of affairs in which rival sellers of some homogeneous product are so small— relative to the total market supply—that they individually have no control over the market price of the product.

  1

  These atomistic sellers take the market price as given and then attempt to generate an output that maximizes their own profit. The final outcome (equilibrium) of such a market organization of firms is that consumers obtain the product at the lowest possible cost and price. Such markets are said to be "purely" competitive ("perfectly" competitive if there is perfect information), and resources are said to be allocated efficiently.

  Free-market monopoly involves some voluntary restriction of market output relative to the output forthcoming under competitive conditions. Economists usually assume that "monopoly" means that there is only one supplier of a product with no reasonable substitutes or that several major suppliers of a product collude to restrict production. The economic effect of such monopolization is that market outputs are restricted—the monopoly "restrains" trade— and prices are increased to consumers. Such restrictions of production are also said to misallocate resources and reduce social welfare.

  The expression "misallocation of resources" is a powerful one in economics. It signifies that scarce economic resources are not being put to their greatest economic advantage. The implication is that some alternative allocation of these resources could improve overall economic performance.

  Monopoly is said to misallocate resources in two fundamental ways. The first is termed "allocative inefficiency." It implies that the price consumers pay for a product under monopoly—the monopoly price—exceeds the marginal cost of producing that product. Consumers indicate their willingness to have suppliers produce more of some product by paying a price that exceeds the marginal cost of producing it. Firms with monopoly power, however, can maximize their profits by restricting their production and keeping their prices up. Suppliers with monopoly power are said to have no incentive to expand production to the point where market price and marginal cost are equal. The consequence of such supply decisions is that resources are at least somewhat misallocated and social welfare is reduced.

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  Microeconomic Theory second edition

  Concepts and Connections

  • Michael E. Wetzstein, Michael Wetzstein(Authors)
  • 2013(Publication Date)
  • Routledge

    (Publisher)

  Firms with monopoly power have always sparked interest among applied economists. The growth of the industrial state in the nineteenth and twentieth centuries spawned a wealth of investigations by economists into the causes, problems, and potential cures for an economy with monopolies. Their cures have ranged from advocating essentially no cure (e.g., Herbert Spencer, 1820–1903, and William Graham Sumner, 1840–1910) to completely replacing the free market (e.g., Karl Marx, 1818– 1883, and Friedrich Engels, 1820–1895). The question that applied economists are now attempting to answer is whether curing the disease (monopoly power) will kill the patient (advancing social welfare). In other words, if the costs of intervening into a market with monopolies (e.g, Microsoft) are more than any benefits received (e.g., advances in computer operating systems), then such intervention is questionable. Thus, applied economists are actively attempting to measure the benefits and cost of various policies designed to promote efficient resource allocation by constraining monopoly-power activities.

  Understanding barriers to entry

  In April 2000, Judge Thomas Penfield Jackson based his ruling against Microsoft in an antitrust suit on the grounds that the company's monopoly operating system is protected by an “applications barrier to entry” made up of 70,000 Windows-based software programs. The amount it would cost an operating system vendor to create 70,000 applications isprohibitively large. The DC Circuit Court of Appeals overturned the ruling and in November 2001, and without further appeal, the case was settled, with Microsoft agreeing to share its programs with third-party companies. The cause of a monopoly (such as Microsoft) is barriers (obstacles) to entry. If other firms could enter the market, there would likely be no monopoly. Barriers to entry are anything that allows existing (incumbent) firms to earn pure profits without threat of entry by other firms. Specifically, barriers to entry are either legal or technical obstacles. One type of legal monopoly

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