Base of Monopoly Power
The main conditions which give rise to monopoly are various. They are called collectively, “Barriers to Entry”. These barriers block the entry of new firm into the industry and thus create monopoly.
Base of Monopoly Power
The main conditions which give rise to monopoly are various. They are called collectively, “Barriers to Entry”. These barriers block the entry of new firm into the industry and thus create monopoly. The main essentials of monopoly power are as follows;
-
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.
-
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.
-
State ownership:
if a government itself owns and operates a business, a monopoly is then established. For instance, Railways, Electricity, are controlled and operated by the Government of Pakistan. No potential firm is allowed entry to the above services. State thus has monopoly in Electricity, Railways.
-
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 a company.
-
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 costs. The new firms being unable to reap the economies enjoyed bu the existing firm will not enter the industry. The big firm will continue controlling the entire supply of a commodity in the market.
-
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 the firms in the industry. The firm or some firms joining together adopt price cutting tactics, put pressure on resource suppliers, pay higher wages to skilled workers, etc. and thus try to bankrupt the competitors. If they are successful in their mission, unfair competition then gives rise to monopoly.
