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Part III: Market Structures and the Decision-Making Environment ✓ Natural Monopoly: Natural monopolies exist due to economies of scale. As the consequence of the economies of scale, the monopoly provides the commodity at much lower cost per unit than potential entrants, discouraging new firms from establishing themselves in the market. Electric companies are an example of a natural monopoly. ✓ Legal Monopoly: Legal monopolies exist due to government legislation and protection. Typically, legal monopolies are privately-owned companies that are granted a monopoly by the government. The legal monopoly is established to protect consumers’ interests. An example of a legal monopoly is local cable television service. In this situation, a local government grants a monopoly in order to eliminate unnecessary duplication of costs that leads to higher prices for customers. For example, two cable television companies have to lay twice as much cable, construct two transmission facilities, and so on. The consequence is a doubling in cost. In addition, these two companies would split the market, resulting in each company serving half as many customers as a monopolist. The inevitable result is higher prices for consumers. ✓ Government Monopoly: A government monopoly is a monopoly that’s owned and operated by government. The primary difference between a government monopoly and a legal monopoly is that the government monopoly is publicly owned while the legal monopoly is privately owned. Examples of government monopolies include garbage collection in some cities and public water companies. ✓ Patent Monopoly: Protection of an invention under the patent laws results in a patent monopoly. This protection’s purpose is to encourage research and development by ensuring a period of time over which the potential for monopoly profit exists. Such protection, however, is temporary; therefore, patent monopolies have a limited lifespan as a monopoly. Examples of patent monopolies are numerous, ranging from Xerox’s patents on components of copying technology to Lego’s patent on the interlocking feature of plastic toy building blocks. ✓ Resource Monopoly: A single firm’s virtual control of an entire resource’s supply results in a resource monopoly. The best current example of a resource monopoly is De Beers’s control of diamonds.
Enjoying the long run Because of barriers to entry, monopolies are able to maintain positive economic profit in the long run. Therefore, the conditions of the short-run equilibrium that I describe in previous sections also describe the long-run equilibrium with one caveat. In order to stay in business in the long run, the monopoly must earn at least zero economic profit.
