What is the difference between a pure monopoly and a natural monopoly

Also, monopolies can be money machines. They are the sole buyer of the products they need or at the very least the largest buyer. They are able to negotiate the prices they pay their suppliers while charging their customers whatever the market can bear. A company can be the only provider of a product or service in a region or an industry because no other company can match its past investment, its technology, or the talent it employs.

The term natural monopoly also is used for a company that has been sanctioned by a government to act as a monopoly because competition is deemed impractical, bad for the public, or both.

Most public utilities in the U. A company that dominates a business sector or industry can use that dominant position to its own advantage and to the disadvantage of its customers, its suppliers, and even its employees. None of these constituencies have any alternative but to accept the status quo. Notably, the Sherman Antitrust Act does not outlaw monopolies. It outlaws the restraint of interstate commerce or competition in order to create or perpetuate a monopoly.

In , the Sherman Antitrust Act became the first U. In , two additional pieces of antitrust legislation were passed to help protect consumers and prevent monopolies:. Our Documents. Federal Trade Commission. Library of Congress.

Reports: United States v. American Tobacco Co. Microsoft Corporation. Accessed Sept. Was It a Success? Company Profiles. Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content. Create a personalised content profile. Measure ad performance.

Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. The government has several types of laws that limit competition, such as licenses that are required to operate a TV or radio station or to operate a taxicab.

Licenses usually result in an oligopoly rather than a monopoly, since several firms can usually obtain licensing. However, the main rights given by governments that give the holder of the right an exclusive property right are copyrights and patents.

A copyright is a time-limited right, granted by the government, to creators of written works, music, software, or art, giving them the exclusive right to sell or license their copyrighted material. In the United States, the time period extends from the time the work is created until 70 years after the death of the author, if the author is a natural person; the copyright for corporations or materials created by work-for-hire lasts the shorter of 95 years from the first date of publication or years after the creation of the work.

Afterwards, the work enters the public domain, when it can be used by anyone without permission from the copyright holder. A patent is a time-limited right, granted by the government, for the patent holder to use the patented item exclusively or to sell that right to someone else.

Most nations have set the time limit of patents to 20 years after the patent application is filed. As with copyrighted materials, the patented item enters the public domain after the patent expires. Many patented items are inventions that resulted from research and development.

For instance, drugs are constantly being developed and patented by drug companies. Obviously, drug companies would not be able to charge such high prices if they cannot prevent competitors from entering the market and providing the drug at a lower cost.

It convinced independent producers to join its single channel monopoly. In instances when producers refused to join, De Beers flooded the market with diamonds similar to the ones they were producing. De Beers also purchased and stockpiled diamonds produced by other manufacturers in order to control prices through supply. The De Beers model changed at the turn of the 21st century, when diamond producers from Russia, Canada, and Australia started to distribute diamonds outside of the De Beers channel.

The sale of diamonds also suffered from rising awareness about blood diamonds. Diamonds : For most of the 20th century, De Beers had monopoly power over the world market for diamonds. In practice, monopolies rarely arise because of control over natural resources. Economies are large, usually with multiple people owning resources. International trade is an additional source of competition for owners of natural resources.

Economies of scale and network externalities discourage potential competitors from entering a market. Economies of scale and network externalities are two types of barrier to entry. They discourage potential competitors from entering a market, and thus contribute to the monopolistic power of some firms. Economies of scale are cost advantages that large firms obtain due to their size.

They occur because the cost per unit of output decreases with increasing scale, as fixed costs are spread over more units of output. Economies of scale are also gained through bulk-buying of materials with long-term contracts, the increased specialization of managers, ability to obtain lower interest rates when borrowing from banks, access to a greater range of financial instruments, and spreading the cost of marketing over a greater range of output.

Each of these factors contributes to reductions in the long-run average cost of production. Economies of Scale : Large firms obtain economies of scale in part because fixed costs are spread over more units of output.

A natural monopoly arises as a result of economies of scale. For natural monopolies, the average total cost declines continually as output increases, giving the monopolist an overwhelming cost advantage over potential competitors. It becomes most efficient for production to be concentrated in a single firm. Network externalities also called network effects occur when the value of a good or service increases as a result of many people using it.

Because of network effects, certain goods or services that are adopted widely will appear to be much more attractive to new customers than competing goods or services. This is evident in online social networks. Social networks with the largest memberships are more attractive to new users, because new users know that their friends or colleagues are more likely to be on these networks.

It is also evident with certain software programs. For example, most people use Microsoft word processing software. While other word processing programs may be available, an individual would risk running into compatibility problems when sending files to people or machines using the mainstream software. This makes it difficult for new companies to enter the market and to gain market share. There are two types of government-initiated monopoly: a government monopoly and a government-granted monopoly.

There are instances in which the government initiates monopolies, creating a government-granted monopoly or a government monopoly. Government-granted monopolies often closely resemble government monopolies in many respects, but the two are distinguished by the decision-making structure of the monopolist. In a government-granted monopoly, on the other hand, the monopoly is enforced through the law, but the holder of the monopoly is formally a private firm, which makes its own business decisions.

In a government-granted monopoly, the government gives a private individual or a firm the right to be a sole provider of a good or service. Potential competitors are excluded from the market by law, regulation, or other mechanisms of government enforcement. Intellectual property rights such as copyright and patents are government-granted monopolies.

Additionally, the Dutch East India Company provides a historical example of a government-granted monopoly. It was granted exclusive trading privileges with colonial possessions under mercantilist economic policy. A monopoly differs from competitive firms in that it is not a price taker. Because it is the only supplier in the market, it faces a downward sloping demand curve, the market demand curve.

As a result, the monopoly is free to choose its price and quantity according to market demand. Monopolies are still profit maximizing firms and are thus going to satisfy the profit maximizing condition that marginal cost equal marginal revenue.

The key to understanding monopolies and monopoly power is the marginal revenue calculation. In a perfectly competitive market, there exists a market price. Marginal revenue is simply equal to price in this market; every additional unit that is sold brings the market price.