Causes of Monopoly
Monopoly exists in a case of one firm in an industry having a competitive advantage over others in supplying a certain product with no close substitutes. In a monopolistic market, a firm enjoys the market power hence can set market prices and has a downward sloping demand curve. Therefore, it has control over the quantity of output to sell or the output price. The market would constitute many independent firms with differentiated products. There exist several factors that influence the existence of a monopolistic market. This paper aims to address some of the causes of such a market.
The control of a firm over key inputs gives the firm an advantage over other competitors. The entity commands supply and production in the industry and the market at large. The concentration of power on few large firms creates a disequilibrium in the market with consumers’ demand being dependent on the price or output set by the monopolistic entities.
The economies of scale set by the incumbent firms create a barrier to entry by emerging firms. New firms that have relatively low output may incur high average costs that lead to losses and collapse. Moreover, the predominance of the firms create brand loyalty. The strength of a brand also hinders entry by other firms that will have to incur huge advertising costs. For example, the monopoly of Coca Cola due to brand loyalty in the drinks and beverage industry has hindered entry to the market by brands such as Pepsi. Google is another brand commanding the technology market.
Asymmetric information causes market failure which contributes to the growth of imperfect markets such as monopoly. With imperfect information, quality and prices are affected creating inefficiency in markets.
Government licensing policy that tends to promote the growth of established industries leading to the concentration of power within few firms. This discourages entry of new firms and facilitates the increase in the deadweight loss and government-created monopolies. For instance, some government issue business licenses exclusively to their allies.
Patents and copyrights give few industries the market opportunity allowing them to exercise market power. Despite the patent system promoting investment, innovation and efficient resource use, it hinders the growth of other entities. A patent offers exclusive rights to its owner. The patentee is viable to create contracts, initiate trade practices and force joint supplies which definitely characterize a monopolistic market. An example is Microsoft. Microsoft has a copyright for Windows’ production. Windows is a key resource that only one firm-Microsoft has a right over it.
Lack of close substitutes of products in the market also promotes the exercise of market power by the dominant firms supplying the goods. A monopolistic market arises with several but single owners to key resources in the economy. In some cases, the resources may be owned by many agents but one buys them and commands the market. For example, De Beers diamond company of South Africa. The company bought different mines and merged to form one company. Nonetheless, DeBeers works towards ensuring that diamonds are seen as unique with no close substitutes despite the existence of other products like gemstones.
Nature also influences the formation of a monopoly market. This arises from the distribution of natural resources. An example is water. Having many firms supplying water means building of different networks of pipes. The setup cost would be high and also create inconvenience to consumers with many piping systems. Provision of public goods requires such a monopolistic supplier. A natural monopoly also best provides a non-rival but excludable good.