Sources of monopoly power, Microeconomics

Sources of monopoly power:

The main sources of monopoly power include the following:

(i) Control of the entire supply of a basic input. It only one firm has access to or controls the entire supply of the basic raw materials required in the production of a product, such a firm will monopolize the supply of the product.

(ii) Economic of scale. A large firm may retain a monopoly power through cost advantages gained from the use of cost – saving technology which enables it to sell profitably at a very low price that discourages other firms or make it unprofitable for other firms.

(iii) Franchise and patent right. A discovery or invention of a give product or a new production process can lead to emergence of monopoly, when government gives the firm legal backing so that no other firm produces the same product or copy the technology. This is to allow the inventor derive the benefit of the money (resources) committed to research and development (R ad D) effort.

(iv) State monopoly. The government may assume monopoly power in the production of some commodities or in the provision of some services; either to prevent people from being exploited or to ensure adequate supply of essential facilities which cannot be provided by private entrepreneurs because of huge capital and high risk involved.This is the case for public utilities, such as electricity, water, railway, transport service, and so on.

Posted Date: 1/3/2013 1:25:24 AM | Location : United States

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