What are the causes of monopoly?

  1. Control over raw materials needed for the production of the goods
  2. Patents over new inventions.  Patents are exclusive rights to the production of an innovative product.  Patents are granted because they encourage inventions. Without patents, many firms (and individuals) would not have much incentive to invest money and resources on research.
  3. Cost of establishing an efficient plant, especially in relation to the market.  This is a case of natural monopoly e.g. electric and gas utilities, telephone companies etc.  It does not make sense to have two electric, gas or telephone companies in the same area.
  4. Market franchises. The government gives exclusive rights to a firm to sell a certain good or service in a certain area.
  5. A monopoly may also be perpetuated by force or by threat.  Potential competitors can be intimidated by threats ranging from sabotage to a price war in which the established monopoly has sufficient financial resources to ensure victory.
  6. A case where firms form cartels i.e. competing firms coming together to form one big firm e.g. OPEC.
  7. Large economies of scale may have led to research and invention (R and D) of better quality products.  Efficiency may allow prices to fall to an extent other firms cannot survive.
  8. Product differentiation advantages resulting from consumer loyalty to established products.
  9. Increasing returns from network effects- increasing returns in network based business e.g. Microsoft (using the market sales penetration curve). When Microsoft produced windows graphical interface (GUI), it managed to achieve the critical level of adoption. Then the amount of marketing and promotional expenditure required to secure the next adoption actually began to fall. Upto 30%, any expenditure (promotional) has less and less (diminishing) effect on adoption. After 30% each expenditure has greater effect hence reducing per unit cost (probability of adoption is greater). After 85%, diminishing returns set in again and the probability of adoption is lesser and lesser in relation to promotional expenses.
  10. Natural Monopoly – the production of natural monopolist is typically characterized by IRS throughout the range of output demanded by the market. We have unending economies of scale i.e. AC keeps declining.

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