How do monopolies happen?

• The monopolist will earn positive long run profits
• When firms in a market enjoy positive profits, new firms will enter until there are zero economic profits.
• For a monopoly to persist, it must be that there exists some form of an entry barrier that prevents new firms from entering the market.

1. Patents, copyrights, and trademarks
   • A new patented technology receives exclusive rights to be the only producer of the technology for up to 20 years.
   • Pharmaceuticals is the most common example of this.
2. Natural Monopoly
   • Sometimes it is most efficient to only have a single supplier in a market. As a result, the firm with the lowest costs (or highest economies of scale) will remain while all other competition will be forced to exit.
   • This generally occurs when the monopolist sells an essential facility in the production process (e.g. tap water, city utilities, airports)
   • Natural monopolies generally have a few things in common:
     • Very high startup and fixed costs
     • Very high economies of scale
     • Often times, the good is viewed as a necessity
3. Government Franchises
   • This allows the government to explicitly control who can enter into an industry (e.g. transportation services, liquor stores)