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Home Price and Output Determination Under Monopoly Base of Monopoly Power

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.

 

Relevant Articles:

 

What is Monopoly
Conditions/Base of Monopoly Power
Monopolist's Demand Curve
Short Run Equilibrium Price and Output Under Monopoly
Long Run Equilibrium Under Monopoly
Comparison Between Monopoly and Competitive Equilibrium or Perfect Competition
Misconceptions Concerning Monopoly Pricing
Monopoly Regulations
Monopoly Price Discrimination
Price and Output Determination Under Discrimination Monopoly
Assessment of Discriminating Monopoly or Price Discrimination
Dumping
 

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
Price and Output Determination Under Monopolistic/Imperfect Competition
Theory of Factor Pricing OR Theory of Distribution
Rent
Wages
Interest
Profits
Principles and Theories of Macro Economics
National Income and Its Measurement
Principles of Public Finance
Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance
History of Money

 

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