ChaPTER 13, uonorotr | 389 \ monopolist making profs will not go unnoticed by others. (Recall that this [economic profi revenue over and above the opportunity costs of the firm's ‘etources) Bot wont other firms crash the party, grab piez of the action, and rive down picasa profits in the long run? Fora profitable monapely to persist ‘orething must keep others fom going Into the same business that “something” |S Known asa harrier to entry. Thee re five principal types of baer to entry ‘onirol ofa scarce resource or input. increasing returns to scale, technologies ‘upeirity, network externality ands governmentcreted barter to entry. 1 Control of @ Scarce Resource oF Input A monopolist that controls a "source or input crucial tan industry ean prevent other firme from entering ts ‘arket. Cecil Rhodes costed the De Beers monopoly by establishing contro over the mines that produced the great hulk ofthe word's diamonds, 2. Increasing Returns to Seale Many Americans hive natural gus piped int thelr hoa, for cooking and eating, Invariably the local gs compa 8 ‘monopolist. Bu why don't rtal companies compete to prove pas? Ta the arly nineteenth centry, when the gas ins was ust starting up, ‘eompantes did compete fot local customers. But thi competition did last font Shor local gaz supply became a monopoly in almost every town Because of the [ings fied eosis involved in providing town svth gas lines. The costo laying 2a ines did't depend on how much 2952 company sad, so a Firm with 9 larger seluave of sales hada cost advantage: because it ens ale to spread the ied cots ter a larger volame, it had lower average loa cos than smaller firme ‘Local gas supply is an ncustey in which average wok cost Falls output Increases. AS We learned ln Chapter Ii, this phenomenon is caled fcrensing ‘tuous © seule There we lene th ohen average ota cat falls Up Increases, fms tend wo grow Inger In an indusiy characterized by Incteas tans to seal, larger companies are more profitable anal drive out salle ones Fr the same reason siablished companies have a cost advantage over any tential entrant-—a potent barrier to entry. So increasing reurns to scale can both pve rise to and sustain monopols ‘A‘monopoly crested and sustained by increasing returns to seal is called a natural monopoly. The defining characteriste of natural monopely state possesses increasing returns to scale over the range of output that i relevant for the industry. This js llustrated in Figure 13-3, showing the fewis average tote fost curve and the market demand curve, D. Here we-can se thet the natural ‘monopolist’ ATC curve declines over the output Ives at which price is grener than or equa to average total cos. ‘So the natural menopolist has ineveasing returns to scale over the entire range of urpurt for whieh any firm woul rent to remain in the iadstey the ‘ange of auiput a hich the firm wou a least break even in the lng eu The Scarce ofthis condition is large fited costs when large Mixed costs ne rele to operate, a given quant of utput Is produced at lower average otal eos BY ‘one large frm than by to oF more smaller firms. ‘The most visible natural menopoies in the moder cconomy are local sulle “water, ga, and sometimes elecirichy, As well sc, natural monopelie pose special challenge te public policy 8, Technological Superiority 4 firm that maintains a consistent technol ‘advantage over potential comperiars can establish Ksell as a monopali., For {example from the 1970s throush the 1990s the chip mansfstarer Ine was able {omaintaina consistent achantage aver potential competitors i bath the design Band production of microprocessor, the chips that am cmpsters. But techn legicl superiority is crpcally mnt a harrier to entry ver she longer ert ver time competitors wll inves in upgrading thelr telinology to match that of the Tomm econo roti a tmonopott mt be potted By 6 Beer to entey—sonetig at eine, ‘ereang euns sclera [Sgr cot aeartage ans tn Sha pote a an ety =‘990 | PART 7 wanker srAUCTURE: BEYOND PERFECT caMPETITION POURES-3._Inerossing Retwins to Scale Craste Netural Monopoly Ate nrg an te on a SS ooerern “= oecloorancaener Sarhe pwsetmaceicg xpeaseercay pratuced mov apt one ge fem than to nao smaer eet moots _| fins. Irate ‘oho tev a3 9d ree tanya post ie te goer eon cut technology leader. foc, Intel has Found its technological superiority erode by competitor Advanced Micro Devices (also knot as AMD), sich now produces hips approsimately 9 fast and 2» power as Intl chip, ‘We should note, however, that in cerain high-tech industries, technological superiority iv nota guarantee of success agsinst competitors hacause af etork esternalitis 4, Network Externality If yo were the only person in the world with an Inuernet connection, what would that connection be worth to you? The answer fof cours, Is nothing, Your internet connection is valuable only becaise other people are also connected. And, in ganral the mere people who are connected, the more valusble your connection is This Phenomenon, whereby the va of a tg00d or service to an individual Is greater when many others use the same good for service, Is alld a network externality—is value derives from enabling ts tsers to porticpate in a network of ether users ‘The earliest form of network externalities arose in transportation, where the value ofa road or airport increased as the numberof people who had access to irose. But network externalities are especialy prevalent inthe lechnology and ‘communications secars ofthe economy, “The classic case is computer operating systems. Worldwide, most personal computers run on Mlerosalt Windows. Alchough many believe that Ape has 8 superior operating system, the wider use of Windows inthe erly days of personal computers atracted more software development and technical support giving it ‘lasing dominnnes, When 2 network externality exss, the firm with the largest network of cus tomers using its product as an advantage in attracting new customers one tht ‘may allow it © become a monopolist Ata minimum, the damian firm can Charge a higher priv and so carn higher profits than competitors. Moreaner. hetwerk externality gies am advantage tothe Firm wth the “deepest pocket Companies with the most money on hand ean sell the most goods at oss with ‘he expectation that doing so will give them the largest customer basehonoree] gar A petont gas an instr s toner reer aoe or ‘8. Governmont-Grested Barrier tn 1998 the pharmaceutical company Merck invroduced Propecia, drug effective against baldness, Despite the fact that Propecia was very profitable and other drug companies had the know-how to produce it, no other firms changed Merck's monopaly. Thats because the U.S. {government had given Merck the soe pal right te prodice the drug inthe United it States. Propecia is an example of a monopoly protected by governmentereaied | barrie, ‘The most important legally crested monopolies today arise from patents and copyrights. Apatent gives an iment thesolerigh to make, ute, or sell hat inven ion for a period that in most countries lass between 16 and 20 years, Patents ire given tothe ercators of new products, such as drugs or devices Small, 2 ‘copyright gives the ereator ofa literary or rustle work the soe right to profit, From that wor, usually fora period equal to the crestor’ lfetime pus 70 year, ‘The jstfieston for patents and copyrights ls» maitrof incentives Tf inven ‘orsare not proteied by patents they would enn litle reward from thelr effort } 25 s00n as 2 valuable invention was made publi, others would copy it and sell : pordcts based ont, And if nvenors could not expect to profi fom the inen- "ions, then there would be no incentive to incur the cost of ivetion in the ese blsce, Likewise forthe creators of literary or artitie works, So the law gives a ‘emporary monopoly tha encourages invention and creation by imposing tempo ‘ary property eights ‘A copyaht is nectar of Ihe orate wah Se het prot em hat wor GLOBAL D sissa, Ate rin chap pte proce gs pats pos Eortie a rom preenon sag e ‘ces cansumer aden cotta ntee toa vamp prea duornvtn ' menapat wil masini pris by charging © ghee ce into county wih a lower pce easy he heh oun an Ter pie te eouy wh «hgh pion lastly the pee cour. rieeseng. Mower, 9 isos can die substan ean amen ceunties wth empataie incons el How dows axle ie? « The anwar iscanoesegaon Tie graph campates the pices pa by ident oft ferent count for Nasonen. 3 cr camonly prescribed lor nasal sergio. shows tat Ameren py rch more than esienis of fer coun, ven say ents ae ‘Surzuard As you cons, Sin odes poy sopra tn oni of what Amwicane pay. and tho Beh pay ‘nhs not an xespnal comparison For Nex 3 |The Price We Pay counsies Pay forte Dg Nasonex BEALL LIF dug conmony rated fr inigeston te Sas pce ‘pan approve enotid the marian pie, le he Bish pico abot one sovanth, And or iptos common proscribed fr high chest, he Aman price see fina high abe Brin pice The rason? Governors thas oer cutis 199 lo dug pees mere aca han te US. gore dah ‘ol ohas dug pce aloe for tr ane To save many, 's nt eupising tht Americans usa to Canada and Mena fo puch th tage o yom Suse Han en cesh i nin Ra i Yet, Amescan dragmakare contend tht higher dg {nd dvdlopmen, hich can rn na he on of one of Aoirs overseer! yrs for sucecesid cage. Cros of ‘ho dg companies counter hat Armerian dg rie Inercast of what nooded fora apealydesata vl oh Ug innovation, stad they tat tug companas ar {00 often focus on oven drugs tat gore Nah oft rather than hos that imare hese ave eee ‘Wiha meeputbl hate ve pon eee my oho nvonionPatents and copyrights are temporary because the lw strikes » compromise ! “the higher pss for the good that hols while the legal protection ir in effect ompensates Inventors forthe cost of invention; conversely, he lew pce that results once the legal prosection lapses and competition emerges benefits con- ‘mers end increases economic efficiency. ‘Because the duration of the temporary monopoly cannot be tailored to spe- cite eves his sytem ie Imperfect and leads to some einsed opportunities. In Some cores there ean be significant welfare issues, For example, the violation of ‘American dru patents by pharmaceutical companies n poor countries has been ‘major source of controversy, piting the needs of poor patients who cannot ford retail drag prices against the interests of drug manufacturers that have fneurre high research costs o discover these drugs "To sole this problem, some American drug companies and poor countries have negotiated deale in which the patents are honored bat the American corn. panies sell their drwgs st deoply discounted prices. (This an exarmpe of price Aisrimination, whic wel leach more about shortly) ECONOMICS i: Profits il no pein the tone rane hee 2 feet entry sich scone oar sours inrecing teh see hnoloea! Spero toi stale, rlgeruactons pera by A mataral monopoly arses ween aves ttl eon {Ectning oer the outage teva fre ny Th Crete a trtro ent bresuse ‘meant monopolist tower ateage tl st a an cera techoloy and omimnistone sts the cones network exteratity nabs a im che largest tmonopots tents copyrights, teamed bar re 2 earl tampa monopls Tt temp alc te sed For Iie pres campeon to, stim forthe eof nvenon Sat the ease nconunor ‘rps on mer pce ond brener fin