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Monopoly
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== Sources of monopoly power == Monopolies derive their market power from barriers to entry β circumstances that prevent or greatly impede a potential competitor's ability to compete in a market. There are three major types of barriers to entry: economic, legal, and deliberate.<ref name=GoodwinEtAl-307308>{{cite book | last1 = Goodwin | first1 = N | last2 = Nelson | first2 = J | last3 = Ackerman | first3 = F | last4 = Weisskopf | first4 = T | title = Microeconomics in Context | edition = 2nd | publisher = Sharpe | year = 2009 | pages = 307β308}}</ref> * ''[[Elasticity of demand]]'': In a complete monopolistic market, the demand curve for the product is the market demand curve. There is only one firm within the industry. The monopolist is the sole seller, and its demand is the demand of the entire market. A monopolist is the price setter, but it is also limited by the law of market demand. If he/she sets a high price, the sales volume will inevitably decline, if expand the sales volume, the price must be lowered, which means that the demand and price in the monopoly market move in opposite directions. Therefore, the [[demand curve]] faced by a monopoly is a downward-sloping curve or a negative slope. Since monopolists control the supply of the entire industry, they also control the price of the entire industry and become price setters. A monopolistic firm can have two business decisions: sell less output at a higher price or sell more output at a lower price. There are no close substitutes for the products of a monopolistic firm. Otherwise, other firms can produce substitutes to replace the monopoly firm's products, and a monopolistic firm cannot become the only supplier in the market. So consumers have no other choice. * ''[[Barriers to entry|Economic barriers]]'': Economic barriers include [[economies of scale]], capital requirements, [[competitive advantage]]s, [[de facto standard]]s, [[network effect]]s, [[strategic entry deterrence]], [[switching barriers]], [[vendor lock-in]], [[vertical integration]] and technological superiority.<ref>{{cite book | first1 = William F. | last1 = Samuelson | first2 = Stephen G. | last2 = Marks | title = Managerial Economics | url = https://archive.org/details/isbn_9780470000410 | url-access = registration | edition = 4th | publisher = Wiley | year = 2003 | pages = 365β366| isbn = 978-0-470-00041-0 }}</ref> * ''Economies of scale'': Decreasing unit costs for larger volumes of production.<ref name="Nicholson 2007">{{cite book | last1 = Nicholson | first1 = Walter | last2 = Snyder | first2 = Christopher | title = Intermediate Microeconomics | publisher = Thomson | year = 2007 | page = 379}}</ref> Decreasing costs coupled with large initial costs, If for example, the industry is large enough to support one company of minimum efficient scale then other companies entering the industry will operate at a size that is less than MES, and so cannot produce at an average cost that is competitive with the dominant company. And if the long-term average cost of the dominant company is constantly decreasing{{clarify|date=December 2016}}, then that company will continue to have the least cost method to provide a good or service.<ref>Frank (2009), p. 274.</ref> * ''Capital requirements'': Production processes that require large investments of capital, perhaps in the form of large research and development costs or substantial [[sunk costs]], limit the number of companies in an industry:<ref>Samuelson & Marks (2003), p. 365.</ref> this is an example of economies of scale. * ''Technological superiority'': A monopoly may be better able to acquire, integrate, and use the best possible technology in producing its goods while entrants either do not have the expertise or are unable to meet the high fixed costs (see above) needed for the most efficient technology.<ref name="Nicholson 2007" /> Thus one large company can often produce goods cheaper than several small companies.<ref>{{cite book | last1 = Ayers | first1 = Rober M. | last2 = Collinge | first2 = Robert A. | title = Microeconomics | publisher = Pearson | year = 2003 | page = 238}}</ref> * ''No substitute goods'': A monopoly sells a good for which there is no close [[substitute good|substitute]]. The absence of substitutes makes the demand for that good relatively inelastic, enabling monopolies to extract positive profits. * ''Control of natural resources'': A prime source of monopoly power is the control of resources (such as raw materials) that are critical to the production of a final good. * ''Network externalities'': The use of a product by a person can affect the value of that product to other people. This is the [[network effect]]. There is a direct relationship between the proportion of people using a product and the demand for that product. In other words, the more people who are using a product, the greater the probability that another individual will start to use the product. This reflects fads, and fashion trends,<ref>Pindyck and Rubinfeld (2001), p. 127.</ref> social networks etc. It also can play a crucial role in the development or acquisition of market power. The most famous current example is the market dominance of the Microsoft Office suite and operating system in personal computers.<ref name="Frank2008" /> * ''Legal barriers'': Legal rights can provide the opportunity to monopolize the market in a good. Intellectual property rights, including patents and copyrights, give a monopolist exclusive control of the production and selling of certain goods. Property rights may give a company exclusive control of the materials necessary to produce a good. * ''Advertising'': Advertising and brand names with a high degree of consumer loyalty may prove a difficult obstacle to overcome. * ''Manipulation'': A company wanting to monopolize a market may engage in various types of deliberate action to exclude competitors or eliminate competition. Such actions include collusion, lobbying governmental authorities, and force (see [[anti-competitive practices]]). * ''[[First-mover advantage]]'': In some industries such as electronics, the pace of product innovation is so rapid that the existing firms will be working on the next generation of products whilst launching the current ranges. New entrants are destined to fail unless they have original ideas or can exploit a new market segment. * ''Monopolistic price'': It may be possible for existing firms to ride the existence of abnormal profit by what is called entry limit pricing. This involves deliberately setting a low price and temporarily abandoning profit maximization in order to force new entrants out of the market. In addition to barriers to entry and competition, [[barriers to exit]] may be a source of market power. Barriers to exit are market conditions that make it difficult or expensive for a company to end its involvement with a market. High liquidation costs are a primary barrier to exiting.<ref name=Png-271>{{cite book | last = Png | first = Ivan | title = Managerial Economics | page = [https://archive.org/details/managerialeconom0000pngi/page/271 271] | publisher = Blackwell | year = 1999 | isbn = 1-55786-927-8 | url = https://archive.org/details/managerialeconom0000pngi/page/271 }}</ref> Market exit and shutdown are sometimes separate events. The decision of whether to shut down or operate is not affected by exit barriers.{{citation needed|date=December 2016}} A company will shut down if the price falls below minimum average variable costs.
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