Answer to Question #25079 in Macroeconomics for Jimmy Vo
What are the necessary conditions for a monopoly position in the market to be established?
Monopoly is a situation, in which a single company owns all or nearly all of the market for a given type of product or service. Three conditions characterize a monopolistic market structure. First, there is only one firm operating in the market. Second, there are high barriers to entry. These barriers are so high that they prevent any other firm from entering the market. Third, there are no close substitutes for the good the monopoly firm produces. Because there are no close substitutes, the monopoly does not face any competition. Barriers to entry. A barrier to entry is anything that prevents firms from entering a market. Many types of barriers to entry give rise to a monopolistic market structure. Some of the more common barriers to entry are Patents: If a firm holds a patent on a production process, it can legally exclude other firms from using that process for a number of years. If there are no other production processes that can be used, the firm that holds the patent will have a monopoly. Large start-up costs: In some markets, firms will face large start-up costs—for example, the cost of building a new production facility. If these start-up costs are large enough, most firms will be discouraged from entering the market. Limited access to resources: A monopolistic market structure is likely to arise when access to resources needed for production is limited. The market for diamonds, for example, is dominated by a single firm that owns most of the world's diamond mines.