Question

What are the sources of a monopoly? Can the government creates a monopoly?

Answer 1

The main sources of monopoly power are as follows.

(i) Access to critical inputs

A firm that has easy and cheaper access to its critical inputs have a supply chain advantage to other firms, therefore becoming a monopoly.

(ii) Exclusive supply chain networking

If a firm can effectively establish an exclusive network with its supplier(s), it can achieve monopoly power.

(iii) Economies of scale

A firm that is able to achieve economies of scale as it expands output, has a cost advantage over other firms, leading to a monopoly power.

(iv) Branding

Branding acts as a barrier of entry in a market where the brand image of existing firm is so strong that other firms cannot work profitably in the market, therefore they either do not enter the market, or exit after making losses.

(v) Regulations

In case government grants monopoly power, the firm gets monopoly status.

If a firm can achieve monopoly power using cost advantage, it becomes a natural monopoly. However, if government grants monopoly status to a firm, it works as monopolist since other firms are not allowed to enter that regulated industry as per government regulations.