Monopoly is a market structure in which there is a single seller producing’ commodities that have no close substitutes. There exist barriers to entry of new firms. The main causes that lead to the evolution and perpetuation of monopoly power are given below.
(i) Control Over Strategic Raw Materials:
Some firms/producers possess exclusive ownership of crucial raw materials or exclusive knowledge of production techniques. They, therefore, monopolise production of goods and services which require such exclusive factors.
For example, countries with large deposits of crude petroleum monopolise production and supply of petroleum products.
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(ii) Patent Rights for a Product or Production Process:
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If a producer develops a product or a production process of his own and gets it patented, he possesses the sole right to produce the output or to use the process. He, thus, acquires the monopoly power in respect of production of goods in question.
For example, firms producing certain brands of soft drinks, photocopiers, cigarettes, automobiles, enjoy the monopoly power in production of these goods due to patent rights. Goods or technologies cannot be imitated by any other producer during the tenure of the patent rights called the patent life.
(iii) Government Licensing of Certain Products or Imposition of Import/Export Barriers:
If a firm or a producer has been licensed to produce a certain product, or if government imposes barriers on import of certain goods or export of certain others, the privileged producer enjoys monopoly power over production and supply of goods in question.
(iv) The Size of Market:
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If the market size is small so that a single producer can comfortably meet the entire demand under economical conditions, he gains monopoly power. For example, production of transport, electricity and communication exhibit substantial economies of scale and require a single plant.
(v) Limit Pricing Policy:
A firm or a producer pursuing a limit pricing policy often prevents new entry. Such a pricing policy may be combined with aggressive advertising and product differentiation so as to make new entry unattractive. The limit price is the lowest price that can be set by a monopoly on the upper half of the AR curve.