A theory of market structure based on three assumptions: There is one seller, it sells a product for which no
close substitutes exist, and there are extremely high barriers to entry.
1) There is one seller:
This means that the firm is the industry
2) The single seller sells a product for which there are no close substitutes:
Because of this, the monopolist faces
little, if any, competition.
3) There are extremely high barriers to entry:
It is difficult to enter the market
Electricity, water, gas, local phone services and postal service (first class mail)
BARIERS TO ENTRY
Legal barriers, economies of scale, or one firm’s exclusive ownership of a scarce resource may make it difficult
or impossible for new firms to enter the market.
1) Legal Barriers
These include public franchises, patents and government licenses
A right granted to a firm by the government that permits the firm to provide a particular good or services
and excludes all others from doing the same (thus eliminating potential competition by law).
Postal Service, public utilities operate under state and local franchises
Exclusive right granted to inventors of a product or process for a period of 17 years.
The rationale behind
patents is to encourage innovation in an economy
Entry into some industries and occupations requires a government granted license.
E.g. radio, television
stations can’t be operated without a license from the Federal Communication Commission (FCC).
states, a person needs to be licensed to join the ranks of physicians, dentists, architects, nurses, barbers, etc.
2) Economies of Scale
In some industries, low ATC are only obtained through large-scale production.
This means that if new entrants
are to be competitive in the industry, they must enter it on a large scale.
But this is risky and costly and acts as
a barrier to entry.
If economies of scale are so pronounced in an industry that only use firm can survive
The condition where economies of scale are so pronounced in an industry that only one firm can survive, e.g.
public utilities, gas, electricity, H