A pure monopoly is an industry with a single firm that produces a product for which there are no close substitutes and in which significant barriers to entry prevent other firms from entering the industry to compete for profits.
Things that prevent new firms from entering and competing in imperfectly competitive industries include:
Economies of scale and other cost advantages enjoyed by industries that have large capital requirements. A large initial investment, or the need to embark in an expensive advertising campaign, deter would-be entrants to the industry.
The idea of rent-seeking behavior introduces the notion of government failure , in which the government becomes the tool of the rent-seeker, and the allocation of resources is made even less efficient than before.
The idea of government failure is at the center of public choice theory , which holds that public officials who set economic policies and regulate the players act in their own self-interest, just as firms do.
A trust is an arrangement in which shareholders of independent firms agree to give up their stock in exchange for trust certificates that entitle them to a share of the trust’s common profits. A group of trustees then operates the trust as a monopoly, controlling output and setting price.
The rule of reason is a criterion introduced by the Supreme Court in 1911 to determine whether a particular action was illegal (“unreasonable”) or legal (“reasonable”) within the terms of the Sherman Act.
The Clayton Act , passed by Congress in 1914, strengthened the Sherman Act and clarified the rule of reason. The act outlawed specific monopolistic behaviors such as tying contracts, price discrimination, and unlimited mergers.
The Federal Trade Commission (FTC), created by Congress in 1914, was established to investigate the structure and behavior of firms engaging in interstate commerce, to determine what constitutes unlawful “unfair” behavior , and to issue cease-and-desist orders to those found in violation of antitrust law.
The Wheeler-Lea Act (1938) extended the language of the Federal Trade Commission Act to include “deceptive” as well as “unfair” methods of competition.
The Antirust Division (of the Department of Justice) is one of two federal agencies empowered to act against those in violation of antitrust laws. It initiates action against those who violate antitrust laws and decides which cases to prosecute and against whom to bring criminal charges.