Question

1. Sources of monopoly power

Monopolists, unlike competitive firms, have some market power. A monopolist can increase price, within limits, without the quantity demanded falling to zero. The main way it retains its market power is through barriers to entry—that is, other companies cannot enter the market to create competition in that particular industry.
Complete the following table by indicating which barrier to entry appropriately explains why a monopoly exists in each scenario.
Scenario
Barriers to Entry
Government-Created Monopolies
Economies of Scale
Exclusive Ownership of a Key Resource
The Aluminum Company of America (Alcoa) formerly controlled all U.S. sources of bauxite, a key component in the production of aluminum. Given that Alcoa did not sell bauxite to any other companies, Alcoa was a monopolist in the U.S. aluminum industry from the late 19th century until the 1940s. In the natural gas industry, low average total costs are obtained only through large-scale production. In other words, the initial cost of setting up all the necessary pipes and hoses makes it risky and, most likely, unprofitable for competitors to enter the market. In order to work for a ridesharing company in the state of California, drivers are required to comply with Assembly Bill No. 5 and classify themselves as independent contractors.

Answer 1

Monopoly power arises when barriers to entry such as exclusive ownership of a key resource, economies of scale, and government regulations prevent competitors from entering a market. In the mentioned scenarios, Alcoa's control over bauxite, the natural gas industry's economies of scale, and California's Assembly Bill No. 5 exemplify these barriers, respectively.

Step-by-step explanation:

Sources of Monopoly Power and Barriers to Entry

The discussion of monopoly power is rooted in a firm’s ability to control the market, usually due to certain barriers to entry that prevent other companies from competing. In the scenarios provided, the barriers to entry that explain the existence of a monopoly are:

Exclusive Ownership of a Key Resource: The Aluminum Company of America (Alcoa) had control over all U.S. sources of bauxite, allowing it to maintain a monopoly on the U.S. aluminum industry.

Economies of Scale: The natural gas industry demonstrates this barrier where large-scale production is necessary to achieve low average total costs, disincentivizing new entrants due to the high initial setup costs.

Government-Created Monopolies: In California, regulations such as Assembly Bill No. 5 create legal restrictions that influence the ridesharing industry, potentially leading to market conditions conducive to monopoly.

These barriers create an environment where a single firm can dominate a market without fear of immediate competition, thus gaining significant market power and the ability to control prices to maximize profits.