As with monopolies, cartels and oligopolies tend to be most successful when there are significant barriers to entry, that is, factors that increase the cost to new firms of entering an industry. Table 15.1 lists some important barriers to entry.

Control over a Key Resource or Input Oil and diamonds are two goods in which cartels have been partially successful because these natural resources are found in only a few places in the world (but see the sidebar on diamonds!). As a result, it’s possible for a few firms or countries to control a significant share of the world’s output. Similarly, Indonesia and Grenada, taken together, control 98% of the world’s supply of nutmeg, a hard to replace spice used in many baking recipes. The nutmeg cartel has had some success. Copper, however, is a natural resource that is distributed more widely. The copper cartel (International Council of Copper Exporting Countries) controls no more than one-third of the world’s copper reserves and as a result has not been able to raise prices in any significant manner. There are also good substitutes for copper in most uses, including plastic, aluminum, and recycled copper. The copper case is more typical than diamonds or oil.

Economies of Scale The advantages of large-scale production mean that it is much cheaper for five car manufactures to make 3 million cars each than for 500 manufacturers to make 30,000 cars each. When economies of scale are important, bigger means cheaper. Bigger firms, however, also means fewer firms, each with potentially more market power. Since people want cheaper cars more than they want extreme variety, it is never going to be optimal to have 500 car manufacturers in the United States so the market will remain something of an oligopoly.

Network Effects Some goods are more valuable the more people use them. Facebook, for example, is more valuable to you when your friends also use Facebook. eBay is more valuable to buyers when there are more sellers on eBay, and eBay is more valuable to sellers the more buyers are on eBay. “Network effects” means that firms can snowball in size as each new customer makes the firm’s product more valuable to the next customer. As a result, goods with significant network effects tend to be sold by monopolies or oligopolies. We discuss network goods at greater length in the next chapter.

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Government Barriers Governments sometimes try to combat monopolies and oligopolies with antitrust law. At other times, governments create barriers to entry with licenses or other regulations that limit entry. Let’s take a closer look at both situations