Question

1. Sources of monopoly power A monopolist, unlike a competitive firm, has some market power. It can raise its price, within limits, without the quantity demanded falling to zero. The main way it retains its market power is through barriers to entry—that is, other companies cannot enter the market to create competition in that particular industry. Complete the following table by indicating which barrier to entry appropriately explains why a monopoly exists in each scenario. Scenario Barriers to Entry Exclusive Ownership of a Key Resource Government-Created Monopolies Economies of Scale Throughout much of the 20th century, many people viewed South Africa’s De Beers Group as a monopoly because it controlled a large percentage of diamond production and sales. In the electricity industry, low average total costs are obtained only through large-scale production. In other words, the initial cost of setting up all the necessary wiring makes it risky and, most likely, unprofitable for competitors to enter the market. Patents are granted to inventors of a product or process for a certain number of years. The reason for this is to encourage innovation in the economy. Without the existence of patents, it is argued, research and development for improved electronics is unlikely to take place, since there’s nothing preventing another firm from stealing the idea, copying the product, and producing it without incurring the development costs.

Answer 1