Causes of Monopoly

Most economists regard monopoly as an exceptional case in a modern economy. In an economy populated by alert profit-seekers, it seems that any profitable monopoly would quickly attract competitors. For a monopoly to be stable, there must be some "barrier to entry." The assumption of free entry into the industry should not apply. Thus, we ask what might create the exception, what might "cause" a monopoly, and what the "barrier to entry" might be.

Following are some of the causes of monopoly

• Patents and other forms of intellectual property

• Control of an input resource

• Government

• Decreasing cost

• Crime

Patents and Other Forms of Intellectual Property

Patent law is designed to increase the incentive to invent new methods of production and new goods. The inventor is granted a temporary monopoly on the use of the invention.  The idea behind this is that the patent makes the invention more profitable, during the term of the patent, and that these profits encourage inventors. So, it increases the rate of technical progress.

Monopoly

• Pure monopoly-- industry is the firm
• Actual monopoly-- where firm has >25% market share
• Natural Monopoly-- high fixed costs-- gas, electricity, water, telecommunications, rail
– High barriers to entry
– Firm controls price or output/supply
– Abnormal profits in long run
– Possibility of price discrimination
– Consumer choice limited
– Prices in excess of MC

Advantages and disadvantages of monopoly:
• Advantages:
– May be appropriate if natural monopoly
– Encourages R&D
– Encourages Innovation
– Development of some products not likely without some guarantee of monopoly in production
– Economies of Scale can be
• Disadvantages:
– Exploitation of consumer-- higher prices
– Potential for supply to be limited-- less choice
– Potential for inefficiency:
X-inefficiency--