When do monopolies arise

The anti-trust laws USA give the government various ways to promote competition. The anti-trust laws also allow the US-government to break up companies. Also other countries try to increase competition. Another way in which the government deals with the problem of monopoly is by regulating the behavior of monopolists. This solution is common in the case of natural monopolies.

The third policy used by the government to deal with monopoly is public ownership. That is, rather than regulating a natural monopoly that is run by a private firm, the government can run the monopoly. An industry owned by the government is called a nationalized industry.

Each of the foregoing policies aimed at reducing the problem of monopoly has drawbacks. As a result, some economies argue that it is often best for the government not to try to remedy the inefficiencies of monopoly pricing. In many cases monopoly firms try to sell the same good to different customers for different prices, even though the cost of producing for the two customers are the same.

This practice is called price discrimination. Price discrimination is not possible in competitive market. Some of the more common barriers to entry are. Natural monopolies. Not all monopolies arise from these kinds of barriers to entry.

A few monopolies arise naturally , in markets where there are large economies of scale. For example, a local telephone company's marginal and average costs tend to decline as it adds more customers; as the company increases its network of telephone lines, it costs the company less and less to add additional customers.

A patent gives the inventor the exclusive legal right to make, use, or sell the invention for a limited time. In the United States, exclusive patent rights last for 20 years.

Roughly 1. A firm can renew a trademark repeatedly, as long as it remains in active use. A copyright , according to the U. Copyright protection ordinarily lasts for the life of the author plus 70 years. Roughly speaking, patent law covers inventions and copyright protects books, songs, and art.

However, in certain areas, like the invention of new software, it has been unclear whether patent or copyright protection should apply. There is also a body of law known as trade secrets. Even if a company does not have a patent on an invention, competing firms are not allowed to steal their secrets. One famous trade secret is the formula for Coca-Cola, which is not protected under copyright or patent law, but is simply kept secret by the company.

Taken together, we call this combination of patents, trademarks, copyrights, and trade secret law intellectual property , because it implies ownership over an idea, concept, or image, not a physical piece of property like a house or a car. Countries around the world have enacted laws to protect intellectual property, although the time periods and exact provisions of such laws vary across countries.

There are ongoing negotiations, both through the World Intellectual Property Organization WIPO and through international treaties, to bring greater harmony to the intellectual property laws of different countries to determine the extent to which those in other countries will respect patents and copyrights of those in other countries. Government limitations on competition used to be more common in the United States.

From the s to the s, one set of federal regulations limited which destinations airlines could choose to fly to and what fares they could charge. Another set of regulations limited the interest rates that banks could pay to depositors; yet another specified how much trucking firms could charge customers. What products we consider utilities depends, in part, on the available technology.

Fifty years ago, telephone companies provided local and long distance service over wires. It did not make much sense to have many companies building multiple wiring systems across towns and the entire country.

The same thing happened to local service, especially in recent years, with the growth in cellular phone systems. The combination of improvements in production technologies and a general sense that the markets could provide services adequately led to a wave of deregulation , starting in the late s and continuing into the s.

This wave eliminated or reduced government restrictions on the firms that could enter, the prices that they could charge, and the quantities that many industries could produce, including telecommunications, airlines, trucking, banking, and electricity. Around the world, from Europe to Latin America to Africa and Asia, many governments continue to control and limit competition in what those governments perceive to be key industries, including airlines, banks, steel companies, oil companies, and telephone companies.

Vist this website for examples of some pretty bizarre patents. Businesses have developed a number of schemes for creating barriers to entry by deterring potential competitors from entering the market. One method is known as predatory pricing , in which a firm uses the threat of sharp price cuts to discourage competition. Predatory pricing is a violation of U.

Consider a large airline that provides most of the flights between two particular cities. A new, small start-up airline decides to offer service between these two cities. 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 the company repeats this pattern 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 that 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. 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.

What is a natural monopoly? What is a legal monopoly? What is predatory pricing? How is intellectual property different from other property? By what legal mechanisms is intellectual property protected? How do you suppose their barriers to entry were weakened? Why are generic pharmaceuticals significantly cheaper than name brand ones? For many years, the Justice Department has tried to break up large firms like IBM, Microsoft, and most recently Google, on the grounds that their large market share made them essentially monopolies.

In a global market, where U. Intellectual property laws are intended to promote innovation, but some economists, such as Milton Friedman, have argued that such laws are not desirable. In the United States, there is no intellectual property protection for food recipes or for fashion designs. Considering the state of these two industries, and bearing in mind the discussion of the inefficiency of monopolies, can you think of any reasons why intellectual property laws might hinder innovation in some cases?

Problems Return to Figure 1. This is not a barrier to entry. This is a barrier to entry, but it is not government-enforced. This is a barrier to entry, but it is not directly government enforced. This is a government-enforced barrier to entry. This is an example of a government law, but perhaps it is not much of a barrier to entry if most people can pass the safety test and get insurance.

Trademarks are enforced by government, and therefore are a barrier to entry. This is probably not a barrier to entry, since there are a number of different ways of getting pure water.

Because of economies of scale, each firm would produce at a higher average cost than before.