Question

1. Sources of monopoly power

A monopolist, unlike a competitive firm, has some market power. It can raise its price, within limits, without the quantity demanded falling to zero. The main way it retains its market power is through barriers to entry—that is, other companies cannot enter the market to create competition in that particular industry.

Complete the following table by indicating which barrier to entry appropriately explains why a monopoly exists in each scenario.

Scenario	Barriers to Entry
	Exclusive Ownership of a Key Resource	Government-Created Monopolies	Economies of Scale
The Aluminum Company of America (Alcoa) formerly controlled all U.S. sources of bauxite, a key component in the production of aluminum. Given that Alcoa did not sell bauxite to any other companies, Alcoa was a monopolist in the U.S. aluminum industry from the late 19th century until the 1940s.
In order to own and operate a taxi, drivers are required to obtain a taxi medallion.
In the natural gas industry, low average total costs are obtained only through large-scale production. In other words, the initial cost of setting up all the necessary pipes and hoses makes it risky and, most likely, unprofitable for competitors to enter the market.

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Answer 1

Scenario	Type of Barrier to Entry	Explanation
The Aluminum Company of America (Alcoa) formerly controlled all U.S. sources of bauxite, a key component in the production of aluminum. Given that Alcoa did not sell bauxite to any other companies, Alcoa was a monopolist in the U.S. aluminum industry from the late 19th century until the 1940s.	Exclusive Ownership of a Key Resource	Alcoa had an exclusive ownership of bauxite, which prevented other firms from entering the market.
In order to own and operate a taxi, drivers are required to obtain a taxi medallion.	Government-Created Monopolies	The medallion system provides exclusive rights to operate taxis to drivers owning medallions. It is a government imposed a restriction on the supply of taxis. This creates an entry barrier and a monopoly in taxi services.
In the natural gas industry, low average total costs are obtained only through large-scale production. In other words, the initial cost of setting up all the necessary pipes and hoses makes it risky and, most likely, unprofitable for competitors to enter the market.	Economies of Scale	In case of economy of scale, a producer producers at a lower average total cost because of producing at a large scale. This creates an entry barrier for new firms as initially, new firms incur a much higher average total cost due to small-scale productions.