Question

What factors explain the existence of monopoly power in markets? Do you believe any of these factors are more impactful than others? Explain your position.

Answer 1

Monopoly is a form of market in which there exist only a single seller who sold goods which does not have close substitutes. There is barrier in the entry of new firms. Under monopoly, the firm is a price maker because it can fix the price for its product. It has free control over the supply of the product. A monopolist firm faces a market demand curve which is negatively sloped. It means that the firm will have to reduce the price to increase its sale. Demand curve of a firm under monopoly is less elastic because the product has no close substitutes.

Characteristics that creates barriers to entry for monopolies and maintains monopoly power in the market:

1. Government Licensing/ Government Control: The government may grant license for the production of a particular commodity only to one producer. Accordingly, monopoly comes into existence. Also, the government may decide to control the production of certain goods or services exclusively through its departmental undertakings, like Railways in India.

2. Patent Rights: New products may secure patent rights. It amounts to monopoly rights regarding the shape, design or other characteristics of the product. Likewise, patent rights may be secured on new technology. It prohibits the use of patented technology by others. Accordingly, monopoly market structure emerges.

3. Cartels: It refers to collective decision making by a group of firms with a view to avoiding competition and securing monopoly control of the market. Competing firms may reach a board agreement on the pricing and output policy so that competition is avoided and a sort of joint monopoly structure of the market emerges.

4. Natural Occurrence: Monopoly may exist as a natural phenomenon. The only spring of water in an island, for example may be under the control of one person who exercises full control over price of water, without any competition.

Patent rights is more impactful than cartel because single firm has complete control over the production of a certain product. Under cartel, 2 firms combine which divides profit equally but when a firm gets patent right then entire profit is of same firm.