Lesson: How Monopolies Form: Barriers to Entry

Control of a Physical Resource

Control of a Physical Resource

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  • When a company has control of a scarce (limited) physical resource, this can cause a natural monopoly.
  • Minerals, gems, and oil are physical resources that can be limited in supply. The company that controls how and when these are mined, and then how they are used and sold, monopolizes the market.
  • The government will sometimes get involved to help regulate the prices.

Another type of natural monopoly occurs when a company has control of a scarce physical resource. In the U.S. economy, one historical example of this pattern occurred when the Aluminum Company of America (ALCOA) controlled most of the supply of bauxite, a key mineral used in making aluminum. Back in the 1930s, when ALCOA controlled most of the bauxite, other firms were simply unable to produce enough aluminum to compete. 

As another example, most of the global diamond production is controlled by DeBeers, a multi-national company that has mining and production operations in South Africa, Botswana, Namibia, and Canada. It also has exploration activities on four continents, while directing a worldwide distribution network of rough-cut diamonds. Although in recent years they have experienced growing competition, their impact on the rough diamond market is still considerable.