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Pure Monopoly: Definition, Characteristics & Examples

Pure Monopoly: Definition, Characteristics & Examples
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Lesson Transcript
Instructor: Susan Fenner

Susan has an MBA in Management from the University of North Alabama. She teaches online and campus-based Business courses.

In this lesson, we'll be looking at a pure monopoly, which involves a sole provider dominating an entire market. After learning about this type of market structure, you can test your knowledge with a quiz.

Definition and Characteristics

A pure monopoly is a market structure where one company is the single source for a product and there are no close substitutes for the product available. Pure monopolies are relatively rare. In order for a provider to maintain a pure monopoly, there must be barriers preventing competitors from entering the market. Let's look briefly at some possible barriers:

1. Legal barriers: While there are laws in the United States that prohibit monopolies, there are several situations where the U.S. government allows them. In some cases, the monopoly may exist indefinitely with the government's permission and in other cases, a monopoly is granted for a specific period of time. Some examples of legal barriers are government-issued licenses, copyrights, and patents.

2. Control of resources: This barrier exists when a sole provider owns or controls an essential resource necessary to production. An example of this is Alcoa. For many years, Alcoa was the only producer of aluminum in the United States. Alcoa obtained exclusive mining rights to all of the bauxite aluminum ore mines in the country, and bauxite is necessary to the production of aluminum. This prevented competitors from entering the market.

3. Economies of scale: The economies of scale barrier occurs when the average total cost of a product goes down when production increases. Some businesses invest large amounts of money building the infrastructure to create their product. This is a fixed cost. Once the infrastructure is in place, the cost of producing a single unit becomes lower for each unit added because the fixed costs are spread out over a larger number of units. In terms of monopolies, an existing business with an established infrastructure has a cost advantage when producing large quantities of a given product, enabling it to undercut the competition on price. This is known as a natural monopoly and most typically refers to public utilities such as water services, natural gas, and electricity.

Examples

The most prominent example of a pure monopoly in the United States is the United States Postal Service (USPS). We have all heard that the Postal Service is losing money. According to a report published in 2014, the USPS lost a staggering $2 billion dollars in just 3 months, despite cutbacks in service. With such a glaring need for improved operations, you might wonder why other businesses haven't entered the market to compete with the Post Office for first-class and standard mail delivery.

Well, it might surprise you to learn that the Post Office is a government-protected monopoly. The Private Express Statutes established in 1792 gives the USPS exclusive rights to deliver letters for a fee, with very few exceptions. Letters that are designated to be 'extremely urgent' may be delivered by other providers but even then, the Post Office is allowed to set the minimum price that the private competition must charge. This is an example of a legal barrier to entering the market.

Another example of a legal monopoly in the United States is a copyright. Copyrights are guaranteed by the government to the creators of written material, art, music, and software. It gives creators the exclusive right to sell or license their work for a limited amount of time. Since 1978, in the case where the author is the natural person, the copyright is granted from the time the work is created until seventy years after the author's death. An example would be Tom Clancy's iconic thriller The Hunt for Red October, first published in 1984. Clancy passed away in 2013, so his copyright will expire in 2083. At that time, his work will enter the public domain, where it can be used by anyone without permission or compensation to the copyright holder.

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