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Monopoly Power

Market Structure

Market Structures

Firms operate in a range of different market structures. Monopolies are characterized by markets with only one supplier of a good or service for which there are no close substitutes.

Firms (organizations or businesses that sell in order to profit) operate in a range of different market structures. A market structure refers to the makeup of a market, such as the number of firms and the characteristics of the goods or services being sold. Economics focuses on four primary models of market structure. In perfect competition there are standardized products, no barriers to entry, and a large number of suppliers and buyers (none of which have market power). A barrier to entry is a legal, economic, or political barrier that prevents or obstructs the entry of new firms into a market and limits the amount of competition that existing firms must face. Market power is the ability of a supplier to set the market price and control the amount of the good or service available to consumers. In a monopoly one company is the only supplier of a good or service for which there are no close substitutes. There are also two different market structures with imperfect competition (in which every firm has some market power and some barriers to entry exist): oligopoly (which consists of a small number of suppliers, each with a degree of market power) and monopolistic competition (in which the suppliers have a low degree of market power and sell differentiated products).

In perfect competition, there are a large number of firms that sell standardized goods, which are goods that cannot easily be distinguished from each other. For consumers, it does not matter which firm they purchase the goods from because all the firms are selling the same good. No firm has any market power—a firm cannot set the market price to its advantage. Every participant in a perfectly competitive market is a price-taker: Whatever price the market will bear is the price at which every supplier must sell. There are also no barriers to entry into the market, which limits the amount of competition that existing firms must face. New firms will quickly enter if there is a profit to be made, and firms will exit if they are incurring losses. All firms in a perfectly competitive market earn at most a normal profit, the situation when a firm's total costs and total revenue are equal, which is the minimum amount of profit necessary to operate.

A pure monopoly is the opposite case. This market structure consists of a monopolist, a supplier that has a monopoly over the provision of a good or service. The monopolist sells a product for which there are no close substitutes. There is no competition, so consumers have no choice regarding where to buy. The monopolist firm has all the market power and can determine the price and the quantity available in the market. However, even in this case the power of the firm is not absolute. The monopolist still needs consumers to purchase its products if it is going to stay in business, and consumers can still decide not to buy the product. Because the monopolist can use its position as the price maker to charge high prices, the monopolist will make above-normal profits. One example of a monopoly is Carnegie Steel Company, founded by Andrew Carnegie. Before there were government policies in the United States in the late 19th century, Carnegie Steel was able to have almost complete control over the steel industry, when steel was needed for infrastructure and many commodities. More recently, there has been debate about monopolies over services such as television and internet.
The perfectly competitive firm on the left faces a horizontal (perfectly price elastic) demand curve (Dpc), which reflects its lack of market power. While it can sell as much as it wants at the price of $4, demand for the firm's output falls to zero at a higher price. The monopolist on the right has market power and can change the price. Because it is the only supplier in the market, it faces an individual firm's demand curve (Dm) which is also the market demand curve. This demand curve is downward sloping-while the monopolist can set the price, it also has to be mindful of the law of demand: if the monopolist wants to sell more it has to lower the price in order to increase quantity demanded.
Because monopolies have a great deal of market power, many countries such as the United States have enacted anti-monopoly policies. An anti-monopoly policy is a policy designed to curb monopolies' excesses to deter them from abusing their market power. In the United States, these take the form of antitrust laws. An antitrust law is a law designed to restrict monopolies and encourage competition in markets. This occurred in the 1980s when the corporation AT&T, the sole provider of telephone service in the country at the time, was considered a monopoly. Congress passed antitrust legislation that forced AT&T to split up into smaller companies. Microsoft was also accused of violating antitrust laws when it forced its users to use its own Internet Explorer browser, which effectively prevented the use of available alternative browsers.