Conditions/Base of Monopoly Power:
Barriers
to Entry:
The main
conditions which give rise to monopoly are various. They are called
collectively, "Barriers to Entry". These barriers block the entry
of new firms into the industry and thus create monopoly. The main essentials of
monopoly power are as follows:
(i)
Ownership of essential raw
material. If a firm owns or controls the
entire supply of an essential raw material used in the production of a
commodity, it then creates a
monopoly by keeping away the competitors out of the
industry.
For
example, 'De Bears Company' of South Africa has a monopoly over the supply of
diamonds.
(ii)
Patent and research. In order to encourage research
for the creation of a new product, the
government gives patent and copyrights to the inventors. The exclusive rights
granted to an inventor to produce and control a product blocks the entry of new
firms producing the same commodity. The inventor, thus, enjoys the monopoly
position for the life of the patent.
(iii)
State ownership.
If a government itself owns arid operates a business, a
monopoly is then established. For instance; Railways, Electricity, are
controlled and operated by the Government. State, thus, has monopoly in
Electricity, Railways, etc.
(iv)
Public utilities.
In order to avoid cut throat competition and waste of
resources, a government grants exclusive rights to a corporation to engage
itself in public utility services. For instance; gas supply in the country, if
given to more than one firms, will lead to unnecessary wastage of resources. So
it is given to one firm to produce and distribute it to the consumers. The
government, however, controls the prices and the rates to be charged by the
company.
(v)
Economies of scale.
If a firm using modern technology and heavy
investment enjoys the increasing returns to scale, it will produce goods at low
unit cost. The new firms being unable to reap the economies enjoyed by the
existing firm will not enter the industry. The big firm will continue
controlling the entire supply of a commodity in the market.
(vi)
Unfair competition.
If a firm or a few firms form a unified business
organization, they then possess sufficient economic power, to eliminate the
entry of would be firms in the industry. The firm or some firms joining together
adopt price cutting tactics, put pressure on resource, suppliers, pay higher
wages to the skilled workers, etc., and thus try to bankrupt the competitors. If
they are successful in their mission, unfair competition can give rise to
monopoly.
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