Table 13.1 summarizes some of the sources of market power. In addition to patents, government regulation and economies of scale, monopolies may be created whenever there is a significant barrier to entry, something that raises the cost to new firms of entering the industry. One firm, for example, might own an input that is difficult to duplicate. Saudi Arabia, for example, has some market power in the market for oil because the demand for oil is inelastic and Saudi Arabia controls a significant fraction of the world’s oil supply. What makes oil special is that oil is found in large quantities in only a few places in the world so a single firm in the right place can monopolize a significant share of the total supply. The market power of Saudi Arabia is enhanced when instead of competing with other suppliers, it joins with them to form a cartel, a group of firms that acts in concert to maximize total profits. We analyze cartels at greater length in Chapter 15.

Brands and trademarks can also give a firm market power because the prestige of owning the real thing cannot be easily duplicated. Timex watches tell the time as well as a Rolex, but only the Rolex signals wealth and status.

Monopolies may also arise when a firm innovates and produces a product that no other firm can immediately duplicate. In 2006, Apple had a 70% share in the market for MP3 players even though Apple’s iPod had many competitors—the iPod was simply better than its rivals.15 As with patent monopolies, monopolies produced by innovation involve a trade-off: iPods are priced higher than they would be if Apple had better competitors, but Apple would have less incentive to innovate if it didn’t expect to earn monopoly profits.

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