Barriers to Entry_ Reasons for Monopolies to Exist _ Boundless Economics.pdf

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courses.lumenlearning.comBarriers to Entry: Reasons forMonopolies to ExistSend to KindleControl over a natural resource that is critical to the production of a final good isone source of monopoly power.Explain the relationship between resource control and monopoliesKey TakeawaysKey PointsSingle ownership over a resource gives the owner the power to raise themarket price of a good over marginal cost without losing customers tocompetitors.De Beers is a classic example of a monopoly based on a natural resource. DeBeers had a lot of market power in the world market for diamonds over thecourse of the 20th century, keeping the price of diamonds high.In practice, monopolies rarely arise because of control over naturalresources.Key Termsmarket power: The ability of a firm to profitably raise the market price of agood or service over marginal cost. A firm with total market power can raiseprices without losing any customers to competitors.
economic rent: The portion of income paid to a factor of production inexcess of its opportunity cost.Control over natural resources that are critical to the production of a good is onesource of monopoly power. Single ownership over a resource gives the owner ofthe resource the power to raise the market price of a good over marginal costwithout losing customers to competitors. In other words, resource control allowsthe controller to charge economic rent. This is a classic outcome of imperfectlycompetitive markets.A classic example of a monopoly based on resource control is De Beers. De BeersConsolidated Mines were founded in 1888 in South Africa as an amalgamation ofa number of individual diamond mining operations. De Beers had a monopolyover the production of diamonds for most of the 20th century, and it used itsdominant position to manipulate the international diamond market. It convincedindependent producers to join its single channel monopoly. In instances whenproducers refused to join, De Beers flooded the market with diamonds similar tothe ones they were producing. De Beers also purchased and stockpiled diamondsproduced by other manufacturers in order to control prices through supply. TheDe Beers model changed at the turn of the 21st century, when diamond producersfrom Russia, Canada, and Australia started to distribute diamonds outside of theDe Beers channel. The sale of diamonds also suffered from rising awarenessabout blood diamonds. De Beers’ market share fell from as high as 90 percent inthe 1980s to less than 40 percent in 2012.
Diamonds: For most of the 20th century, De Beers had monopoly power over theworld market for diamonds.In practice, monopolies rarely arise because of control over natural resources.Economies are large, usually with multiple people owning resources.

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Term
Fall
Professor
Monsod
Tags
Economics, Government, Monopoly, Government granted monopoly

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