![]() They discourage potential competitors from entering a market, and thus contribute to the monopolistic power of some firms.Įconomies of scale are cost advantages that large firms obtain due to their size.They occur because the cost per unit of output decreases with increasing scale, as fixed costs are spread over more units of output. Define Economies of Scale., Explain why economies of scale are desirable for monopoliesĮconomies of scale and network externalities are two types of barrier to entry.International trade is an additional source of competition for owners of natural resources. Economies are large, usually with multiple people owning resources. In practice, monopolies rarely arise because of control over natural resources. A legal monopoly refers to a company that is operating as a monopoly under a government mandate. De Beers’ market share fell from as high as 90 percent in the 1980s to less than 40 percent in 2012.ĭiamonds: For most of the 20th century, De Beers had monopoly power over the world market for diamonds. The sale of diamonds also suffered from rising awareness about blood diamonds. The De Beers model changed at the turn of the 21st century, when diamond producers from Russia, Canada, and Australia started to distribute diamonds outside of the De Beers channel. De Beers also purchased and stockpiled diamonds produced by other manufacturers in order to control prices through supply. In instances when producers refused to join, De Beers flooded the market with diamonds similar to the ones they were producing. The government creates such monopolies for the following reasons. It convinced independent producers to join its single channel monopoly. A public monopoly is set up by the government to supply important products and services. Courts look at the firms market share, but typically do. De Beers had a monopoly over the production of diamonds for most of the 20th century, and it used its dominant position to manipulate the international diamond market. That is how that term is used here: a monopolist is a firm with significant and durable market power. One fi Monopoly and perfect competition are on opposite sides of the market structure spectrum. One firms monopoly position is created and enforced by the government, d. One firm has control over the entire supply of a basic input required to produce the product, c. De Beers Consolidated Mines were founded in 1888 in South Africa as an amalgamation of a number of individual diamond mining operations. Small firms merge to form larger firms, b. This is a classic outcome of imperfectly competitive markets.Ī classic example of a monopoly based on resource control is De Beers. In other words, resource control allows the controller to charge economic rent. Single ownership over a resource gives the owner of the resource the power to raise the market price of a good over marginal cost without losing customers to competitors. Explain the relationship between resource control and monopoliesĬontrol over natural resources that are critical to the production of a good is one source of monopoly power.
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