Why monopoly arises

Potential competitors are excluded from the market by law, regulation, or other mechanisms of government enforcement. Intellectual property rights such as copyright and patents are government-granted monopolies. Additionally, the Dutch East India Company provides a historical example of a government-granted monopoly. It was granted exclusive trading privileges with colonial possessions under mercantilist economic policy. In a government monopoly, an agency under the direct authority of the government itself holds the monopoly, and the monopoly is sustained by the enforcement of laws and regulations that ban competition or reserve exclusive control over factors of production to the government.

The state-owned petroleum companies that are common in oil-rich developing countries such as Aramco in Saudi Arabia or PDVSA in Venezuela are examples of government monopolies created through nationalization of resources and existing firms. The United States Postal Service is another example of a government monopoly. It was created through laws that ban potential competitors from offering certain types of services, such as first-class and standard mail delivery.

Around the world, government monopolies on public utilities, telecommunications systems, and railroads have historically been common. Postal Service : The postal service operates as a government monopoly in many countries, including the United States. The government creates legal barriers through patents, copyrights, and granting exclusive rights to companies.

In some cases, the government will grant a person or firm exclusive rights to produce a good or service, enabling them to monopolize the market for this good or service. Intellectual property rights, including copyright and patents, are an important example of legal barriers that give rise to monopolies.

Copyright gives the creator of an original creative work such as a book, song, or film exclusive rights to it, usually for a limited time, with the intention of enabling the creator to be compensated for his or her work. The intent behind copyright is to promote the creation of new works by providing creators the opportunity to profit from their works.

The copyright holder receives the right to be credited for the work, to determine who may adapt the work to other forms, who may perform the work, and who may financially benefit from it, along with other related rights. When the copyright on a work expires, the work is transferred to the public domain, enabling others to repurpose and build on the work.

Copyright : Copyright is an example of a temporary legal monopoly granted to creators of original creative works. A patent is a limited property right the government gives inventors in exchange for their agreement to share the details of their invention with the public. During the term of the patent, the patent holder has the right to exclude others from making, using, or selling the patented invention.

The patent provides incentives 1 to invent in the first place, 2 to disclose the invention once it is made, 3 to make the necessary investments in research and development, production, and bringing the invention to market, and 4 to innovate by designing around or improving upon earlier patents.

When a patent expires and the invention enters the public domain, others can build on the invention. For example, when a pharmaceutical company first markets a drug, it is usually under a patent, and only the pharmaceutical company can sell it until the patent expires. This allows the company to recoup the cost of developing this particular drug.

After the patent expires, any pharmaceutical company can manufacture and sell a generic version of the drug, bringing down the price of the original drug to compete with new versions. It is also possible that there is a monopoly because the government has granted a single company exclusive or special rights. The water utility company, for example, is a monopoly in your area because it is the only organization granted the right to provide water.

Another example is that the Digital Millenium Copyright Act the proprietary Macrovision copy prevention technology is required for analog video recorders.

Natural monopolies occur when a single firm can serve the entire market at a lower cost than a combination of two or more firms. Natural monopolies occur when a single firm is able to serve the entire market demand at a lower cost than any combination of two or more smaller firms.

The total cost of the natural monopoly is lower than the sum of the total costs of two firms producing the same quantity. Along with this, the average cost of production decreases and then increases. In contrast, a natural monopoly will have a marginal cost that is constant or declining, and an average total cost that drops as the quantity of output increases. Natural monopolies tend to form in industries where there are high fixed costs.

A firm with high fixed costs requires a large number of customers in order to have a meaningful return on investment. As it gains market share and increases its output, the fixed cost is divided among a larger number of customers. Therefore, in industries with large initial investment requirements, average total costs decline as output increases. Once a natural monopoly has been established, there will be high barriers to entry for other firms because of the large initial cost and because it would be difficult for the entrant to capture a large enough part of the market to achieve the same low costs as the monopolist.

Examples of natural monopolies are water and electricity services. For both of these, fixed costs of building the necessary infrastructure are high. There are several different types of barriers to entry. The supply of natural resources such as precious metals or oil deposits is limited, giving their owners monopoly powers.

Some production processes require large investments in capital or large research and development costs that make it difficult for new companies to enter an industry. Examples include steel production, pharmaceuticals, and space transport. Monopolies exhibit decreasing costs as output increases. Decreasing costs coupled with large initial costs give monopolies a cost advantage in production over would-be competitors.

Market entrants have not yet achieved economies of scale, so their output simply costs so much more than the incumbent firms that market entry is difficult. The use of a product by other people can increase its value to a person. One example is Microsoft spreadsheet and word processing software, which is still used widely. This is because when a person uses software that is used by so many others, he or she is less likely to run into compatibility problems in the course of work or other activities.

That means, unlike firms in a competitive market, a monopolist has the ability to influence the market price of the good or service it sells. By definition, a firm is considered a monopoly if it is the sole seller of its good or service and its product does not have any close substitutes.

There are a number of different factors that can cause a monopoly to arise. However, all of these factors essentially have to do with barriers to entry. Thus, in the following paragraphs, we will look at the three most relevant causes of monopoly markets: 1 Ownership of a key resource, 2 government regulation, and 3 economies of scale.

A firm that has exclusive control or ownership of a key resource can restrict access to that resource and establish a monopoly. The limited availability of the key resource will make it impossible for new sellers to enter the market. Although this factor is important in economic theory, monopolies rarely ever arise for this reason in reality anymore.

Mainly because most resources are available in various regions across the globe. One famous example of a monopoly that arose because of ownership of a key resource is the diamond market in the twentieth century.

As a result, De Beers could dominate the market and influence the market price at will. The government can restrict market entry by law e. Reasons for a Monopoly Economies of Scale. Economies of scale, wherein products made in larger quantities become cheaper and products made in smaller quantities are more expensive, create barriers to entry when average total costs are high.

Ownership or Control of a Key Resource. Strategic Pricing. Legal Barriers. Similarly, what are the three main sources of barriers to entry for monopolies? These barriers include: economies of scale that lead to natural monopoly ; control of a physical resource; legal restrictions on competition; patent, trademark and copyright protection; and practices to intimidate the competition like predatory pricing.

A market might have a monopoly because: 1 a key resource is owned by a single firm; 2 the government gives a single firm the exclusive right to produce some good; or 3 the costs of production make a single producer more efficient than a large number of producers.

The four key characteristics of monopoly are: 1 a single firm selling all output in a market, 2 a unique product, 3 restrictions on entry into and exit out of the industry , and more often than not 4 specialized information about production techniques unavailable to other potential producers.

Control over Prices: Monopoly will always try to fix the highest possible price which it can obtain from the customers, so as to earn minimum profit. The state can control the monopoly by fixing the profits and the prices and ensure that the industry does not earn undue profit. Sources of Monopoly Power.

Netflix could be considered a monopoly because it produces more content than any competitor. Con Edison is a perfect example of a monopoly. Con Edison is the only provider of electricity, water and gas in the United States, therefore they have only one firm.

Thus because they are the only firm who provides us with electricity, water and gas, they have complete control over the market. A monopoly is a firm who is the sole seller of its product, and where there are no close substitutes. An unregulated monopoly has market power and can influence prices. Examples : Microsoft and Windows, DeBeers and diamonds, your local natural gas company. The advantage of monopolies is an ensured consistent supply of a commodity that is too expensive to provide in a competitive market.

An electric company is a good example of a needed monopoly.