The origin of monopoly may be legal or technological or both. A firm can continue to enjoy the monopoly power, or competitive advantage, so long as, it can prevent the entry of other firms into the industry.
The moment other firms are able to enter into the industry, the position changes radically and the erstwhile monopoly loses its monopoly power leading to a change in the market form affecting check over pricing strategies. Following factors are responsible for creating conditions for the emergence and growth of monopoly.
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1. Control over Strategic Raw Materials:
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Ownership and control of entire or most of the supply of basic inputs and strategic raw materials or exclusive knowledge of production and distribution techniques by a single firm lead to monopoly conditions. As this monopoly may arise due to regional factors like availability of some key localised raw materials, climatic conditions or even possession of a rare talent, it may be called as a regional monopoly.
2. Small Size of Market:
Sometimes, the size of the market or technology is such that output of only one firm of optimum size is sufficient to meet the demand of the entire market comfortably. Under these circumstances, all the firms except the largest and the most efficient one will have to leave the industry.
Advantages of large scale production make it possible for a single firm to produce the entire output of the market at lower average cost (due to increasing returns to scale) than a number of firms each producing a small quantity.
On account of technological development during the last few decades, the need for producing the output on a very large scale has been felt so as to reap the associated economies and keep the price at a low level. In other words, the production can be efficiently carried out only at a very large scale of operation with huge investment.
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In such cases, more firms would mean that none of them would be able to exploit these economies of large scale. Moreover, the heavy investment itself constitutes a deterring force for the entry of new firms.
Sometimes this heavy investment requirement is coupled with long-run gestation and low return, which make still more difficult for potential entrants in the field. Consequently, the monopoly of the existing firm continues.
The presence of economies in certain lines of production results in mass production by a single firm of the optimum size. Either the optimum firm is so large or the market is so small that the industries can accommodate only one firm.
This single firm produces and supplies technically most efficient level of output with the most efficient production plant in relation to the size of the market. This single most important cause responsible for the emergence and growth of monopoly creates natural monopoly, since it is a natural result of the operation of market forces in a given situation.
3. Patents, Copy Rights and Licences:
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Legal backing provided by the Government to produce a particular product through granting of patents, copy rights, trade marks, licences and quota for a given period may create and perpetuate monopoly.
These rights may be acquired through distinctive work, innovation of new products, new processes, new devices through sustained efforts and enormous expenditures on research and development or otherwise.
These rights are protected by law against imitation by rival producers. The right to produce the product remain vested in the original person firm and no other can legally produce it.
A Foreign competition may be restricted by the Government by imposing tariffs and other foreign trade barriers. All this encourages invention and avoids the risk of low returns, particularly, when the new processes can be learnt with less cost.
The right to use the invention can be sold through licensing for a limited period. Whatever be the way, this monopoly is termed as legal monopoly, since it arises as a result of a legal priviledge or support.
4. Limit Pricing:
Sometimes, the existing firm adopts a limit price policy combined with other policies such as heavy advertising or continuous product differentiation to prevent entry by potential firms. The firm may even go to the extent of indulging in unfair competition with the new entrants to make the entry of outside firms unattractive when it faces an effective threat to entry.
5. Public Utilities:
The Government generally undertakes the production of the product or of the essential services like transportation, electricity, water, and communications etc., to avoid the exploitation of the consumers. We often find monopoly tendencies in these services on account of economies of large scale.
The Government grants special charter or franchise to such monopolies, prohibiting the entry of new firms and hence competition by law. Public utility services are created by the Government taking welfare in perspective. If these services are left open to the private sector, it will generate unnecessary competition and wastage of resources.
Since such services are undertaken by the Government in the public or social interest, the monopoly so results is termed as welfare monopoly or public monopoly or social monopoly. With privatisation, it may cease to be public monopoly on account of competition.
6. Monopolistic Combinations:
Monopoly may be the result of combinations. It is possible for a number of competing firms in an industry to come to a voluntary agreement among themselves to eliminate competition in the matter of price, output and market share.
It is called a voluntary monopoly, since, firms producing the same product come together voluntarily through merger/amalgamation to earn more profits. Acquisition or purchase of one firm by the other may be other possibilities. Sometimes, potential competitors are intimidated by threats ranging from sabotage to a price war.
7. Fiscal Monopoly:
There are certain monopolies, created by the Government itself. Printing of currency notes and stamps, minting of coins, etc. are some examples. The nature of these services is that they cannot be entrusted to private enterprises.
The different types of monopolies described above cannot continue for long. It is possible for rivals to enter the market at some stage or the other, especially when the market expands. However, public monopoly and fiscal monopoly have a tendency to continue.