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Government Restrictions

24 April, 2015 - 15:39

Another important basis for monopoly power consists of special privileges granted to some businessfirms by government agencies. State and local governments have commonly assigned exclusive franchises—rights to conduct business in a specific market—to taxi and bus companies, to cable televisioncompanies, and to providers of telephone services, electricity, natural gas, and water, although the trend in recent years has been to encourage competition for many of these services. Governments might also regulate entry into an industry or a profession through licensing and certification requirements.Governments also provide patent protection to inventors of new products or production methods in order to encourage innovation; these patents may afford their holders a degree of monopolypower during the 17-year life of the patent.

Patents can take on extra importance when network effects are present. Network effects arise in situations where products become more useful the larger the number of users of the product. For example, one advantage of using the Windows computer operating system is that so many other people use it. That has advantages in terms of sharing files and other information.

KEY TAKEAWAYS

  • An industry with a single firm, in which entry is blocked, is called a monopoly.
  • A firm that sets or picks price depending on its output decision is called a price setter. A price setter possesses monopoly power.
  • The sources of monopoly power include economies of scale, locational advantages, high sunk costsassociated with entry, restricted ownership of key inputs, and government restrictions, such as exclusive franchises, licensing and certification requirements, and patents.
  • A firm that confronts economies of scale over the entire range of output demanded in an industry is a natural monopoly.

TRY IT!

What is the source of monopoly power—if any—in each of the following situations?

The U.S. Food and Drug Administration granted Burroughs Wellcome exclusive rights until 2005 to manufacture and distribute AZT, a drug used in the treatment of AIDS. John and Mary Doe run the only shoe repair shop in town. One utility company distributes residential electricity in your town. The widespread use of automatic teller machines (ATMs) has proven a boon to Diebold, the principal manufacturer of the machines.

Case in Point: The Ambassador Bridge Fights to Maintain Its Monopoly

Matty Moroun was quietly enjoying his monopoly power. He is the owner of the 75-year-old Ambassador Bridge, a suspension bridge that is the only connection between Detroit, Michigan and Windsor, Ontario. He purchased the bridge from Warren Buffet in 1974 for $30 million. Forbes estimates that it is worth more than $500 million today. Mr. Moroun now oversees the artery over which $100 billion of goods—one quarter of U.S. trade with Canada and 40% of all truck shipments from the U.S.—make their way between the two countries.

Despite complaints of high and rising tolls—he has more than doubled fares for cars and tripled fares for trucks—Mr. Moroun has so far held on. Kenneth Davies, a lawyer who often battles Mr. Moroun in court, is a grudging admirer. “He’s very intelligent and very aggressive. His avarice and greed are just American capitalism at work,” he told Forbes.

What are the sources of his monopoly power? With the closest alternative bridge across the Detroit River two hours away, location is a big plus. In addition, the cost of creating a new transportation link is high. A group that is considering converting an old train tunnel to truck use and boring a new train tunnel some distance away is facing a $600 million price tag for the project. In addition to having entry by potential competitors blocked , he has a status not shared by most other monopolists. The Michigan Supreme Court ruled in 2008 that the city of Detroit cannot regulate his business because of the bridge’s international nature. Canadian courts have barred any effort by Canadian authorities to regulate him. He will not even allow inspectors from the government of the United States to set foot on his bridge.

Increased security since 9/11 has caused delays, but Mr. Moroun has eased these by increasing his own spending on security to $50,000 a week and by building additional inspection stations and gifting them to the U.S. inspection agency, the General Services Administration. Even a monopolist understands the importance of keeping his customers content!

Because of the terrorist attacks on 9/11 and the concern about vulnerability and security, calls to deal with this monopoly have increased. Some people argue that the government should buy what is the most important single international arterial in North America, while others have called for more regulatory oversight. Canadian groups are exploring the development of alternative means of bringing traffic between the United States and Canada. Time will tell whether Mr. Moroun can hold onto what Forbes writers Stephane Fitch and Joann Muller dubbed “the best monopoly you never heard of.”

Sources: Stephane Fitch and Joann Muller, “The Troll Under the Bridge,” Forbes 174:10 (November 15 2004): 134–139; John Gallagher, “Plan Uses Parkway to Ease Ambassador Bridge Traffic,” Detroit Free Press, May 1, 2008; and “State Supreme Court Sides with Ambassador Bridge in Dispute,” Detroit News, May 7, 2008.

ANSWERS TO TRY IT ! PROBLEMS

The government’s grant of an exclusive franchise to the drug gave the firm monopoly power. While John and Mary have the only shop in town, this is an easy entry business. Further, there may be competitors in the nearby town. John and Mary probably have monopoly power, but they do not have a monopoly. Natural monopoly Patent with strong network effects