At the end of the 19th century, social and economic changes brought about by the Industrial Revolution threatened the viability of capitalism. By creating antitrust law, the government successfully curtailed the worst abuses of monopoly power. Now, at the end of the 20th century, we are in the midst of the Information Revolution. The applicability of 20th century law to the 21st century economic order is being tested by recent government action against the largest of the software giants, Microsoft Corporation.
A market is characterized by increasing returns to scale when the cost of producing an additional unit of a product goes down as the quantity of the product produced goes up. Electric power and other public utilities are examples of markets that exhibit increasing returns to scale. Most of the cost of providing electric power comes from setting up the infrastructure of power lines. Once that infrastructure is in place, pumping more and more power over those lines costs little. The presence of increasing returns to scale means that large companies can produce more efficiently than small companies. A market that has high natural barriers to entry is referred to as a natural monopoly because such a market has a tendency to become a monopoly. Barriers to entry are factors that make it difficult for a new competitor to break into a market. Some barriers to entry include patents and intellectual property rights, control over essential capital resources, buyer preference for established brands, government licensing or protective legislation, and the existence of increasing returns to sale. The presence of barriers to entry reduces the amount of competition because potential competitors are prevented from entering the market. Barriers to entry can lead to monopolies or markets dominated by a few large firms. Indeed, in the presence of increasing returns to scale, a market that consists of a single large producer is the most economically efficient.
