Purpose:

Objectives:

1. Market power is directly related to the producer’s ability to control the total production of a product and therefore keep prices and profits high.
   
   
   1. At one extreme monopolists can control total output and therefore keep prices high—they are the price makers.
   2. At the other extreme, in perfectly competitive markets, sellers have no control over prices—they are price takers.
2. The concentration of market power depends on entry barriers, such as:
   
   
   1. Ownership of a resource (e.g., oil) or process (e.g., patents on Polaroid film) or transportation or marketing outlets.
   2. Economies of scale (e.g., the large fixed costs necessary to start a telephone company). Some markets, such as those for local utilities, have such large economies of scale that they are “natural monopolies.”
   3. Even if entry barriers are high, some firms may try to compete with monopolies because the level of the monopolist’s profits is so high.
3. The more concentrated market power is in a given market, the higher the likelihood that it is operating in a way that is economically inefficient for society as a whole. Producers with a high degree of market power are likely to set prices at a level that is higher than the level that would prevail in perfectly competitive markets and produce less than would be produced in a perfectly competitive market. From society’s point of view, this is not economically efficient.
4. The government tries to minimize or control monopolies:
   
   
   1. If the market is not a natural monopoly, a monopoly may be dismantled by antritrust action.
   2. In the case of natural monopolies, the government will regulate the firm.