Nov 17 2006
Conditions for Monopoly
Coming out the microecon class, just had a thought about monopoly:
1. Can we predict when monoply is going to happen?
2. What is the life cycle of monopoly?
My guess is monopoly will happen given the following:
1. The condition of monopoly only exist in long term;
2. There is a large gap between supply and demand;
3. There is a significant barrier to entry (measured in fixed cost over capital cost–including socio-political)
What I learned from microecon is the uncommon phenomenon of declining variable cost over time (e.g. volumn advantage over supplier) It is a misnomer to think barrier to entry as only the setup/fixed/sank cost. In fact, BoE should also include past capital accumulation reflected in declining variable cost. For example, retail should have relatively low barrier to entry in terms of fixed cost. But how many can compete against Wal-Mart now? Wal-Mart’s past capital accumulation has helped it to achieve certain level of pricing power over its suppliers. This pricing power is the real BoE in retail.