In the economic context, a monopoly is a firm that has market power. Unlike a firm in a competitive market, a monopoly has the ability to influence the price of the goods or services they sell. By definition, a firm is considered as monopoly if it is a sole seller of goods or services and its products have no close successor.
There are several different factors that can cause a monopoly to emerge. However, all of these factors are essentially related to the barriers to entry. Thus, in the following paragraphs, we will look at three main reasons for a monopoly market which is ownership of a key resources, government regulation and economic scale. Ownership Of A key Resources
1 ) Ownership Of A key Resources
Firms that have exclusive control or ownership of key resources can restrict access to those resources and create monopolies. The lack of limited resources will make it impossible for new sellers to enter the market. Although this factor is important in economic theory, monopolies are rarely related for this reason in reality. This is because most of the resources are already available in various regions around the world.
A well-known example of a monopoly that arose due to the ownership of major sources was the diamond market in the twentieth century. During this period, the De Beers company has successfully monopolized most of the diamond mines around the world, either through direct ownership or exclusive agreements. As a result, De Beers is able to dominate the market and influence market prices in the.
2) Government Regulation
Governments can restrict any parties to entry the market by copyright law which may result a monopoly. Governments usually do this for the public interest because these regulations reflect research and development innovation (R & D). The idea behind this is so the firms can be rewarded for their R&D efforts by getting exclusive rights to sell their products. Without protection like this, it makes more sense for many firms to let others do research and only copy their products when they are on the market.
Arguably the most prominent example of a controlled government monopoly can be found in the pharmaceutical industry. It often takes more than a decade for companies to develop new medicines. However, if successful, the company can apply for a patent and become the sole seller of the new medicines for a set period of time. This monopoly position allows them to make sufficient profits to cover high R&D expenses.
3 ) Economic Scale (Natural Monopoly)
In some industries, a single firm can supply goods or services at a lower cost than two or more affordable companies. We call this a natural monopoly because it arose without government intervention. Natural monopolies can arise in industries where companies face high fixed costs but can create significant economic scale against the relevant output range. The situation has led to a decrease in average total costs with increasing output which makes it more difficult for new firms to enter the market.
The electricity market is a common example of a natural monopoly. Building infrastructure to supply a city with electricity is very expensive. Therefore, the market has high barriers to entry. However, connecting additional homes to the power grid is relatively inexpensive once the infrastructure is complete. Thus, a company can supply the entire city at a lower cost than two or more competing companies.
Monopoly is a company that has the ability to influence the market price of the goods or services they sell. There are three main factors that can cause a monopoly to arise which are all related to barriers to entering the market: (1) Ownership of a primary resources: When a firm has exclusive ownership of primary resources, it can restrict access to these resources and create a monopoly. (2) Government regulations: Governments can restrict market entry with copyright laws that may result in monopolies. (3) Economic scale: For some industries, a single firm can provide good and cheaper services than two or more firms that can produce a natural monopoly.