How Monopolies Form: Barriers to Entry (continued)/ Check Your Understanding
How Monopolies Form: Barriers to Entry (continued)
💡
Main Ideas
In a free-market, monopolies are discouraged. A monopoly controls the price and supply. Consumers are unable to find alternatives. There is no competition. Profit (wealth), wealth, and influence are in the hands of a single company.
Monopolies control the market through each of the following:
high barriers of entry - companies that want to compete cannot enter the market because the single company controls the market
single seller - only one provider of the product or service in the industry
price maker - control the price without any risk of a competitor challenging the price
economies of scale - ability to purchase large quantities of raw materials at a discounted cost
Two types of monopolies are:
natural monopoly - company has high fixed costs or is very specialized; company may have a patent meaning no competitors in the market
There are two types of monopoly, based on the types of barriers to entry they exploit. One is natural monopoly, where the barriers to entry are something other than legal prohibition. The other is legal monopoly, where laws prohibit (or
severely limit) competition.