Chapter 12, Problem 1Q

To determine

The meaning and ways to gain market power by the monopolist.

Explanation of Solution

Monopoly is a market of one seller who is selling a unique product, and faces no competition because no close substitutes exist in the market. Market power is a term which means that the seller has the ability to raise the market price over the marginal cost in market. Price and marginal cost play a very important role in market power.

There are two types of monopoly, namely, natural monopoly and legal monopoly. A firm is considered to be a natural monopoly, if the average total cost decreases with an increase in output. Legal monopoly arises through patents, copyright, et cetera. A firm can gain a monopoly by creating a barrier to enter, that is not created by the firm itself. For example, a firm can get legal monopoly by the government through patenting specific software while a natural monopoly is created through control over specific resources.