The foundations of monopoly power rest on (1) the absence of substitutes, and (2) restrictions on the entry of new firms into the business. A restriction on the entry of new firms into the market is an important condition of monopoly.
A monopolist can influence price by curtailing his output. He can go on doing this successfully if entry into the industry is rendered difficult for other firms. Restrictions on new entry may be due to the following reasons:
Reasons
(a) Natural Monopolies:
There are certain commodities whose supply is limited by nature. In such cases the firm which owns the limited source has an absolute monopoly. The De Beers Company of South Africa virtually controls all diamond mines and may be said to be a case of natural monopoly.
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(b) Social Monopolies:
Considering the greater interest of the people the State deliberately creates these monopolies. Social monopolies are also known as public utility monopolies. The objectives are to prevent wastage of capital equipment and to provide certain essential commodities at a cheap rate.
If public utilities are to be operated without loss, then they must come under the control of a single firm if two electric companies are allowed to serve the same locality, there will be unnecessary and useless duplication of electric lines in the same street.
(c) Legal Monopolies:
When the law prevents duplication of a product a legal monopoly is created. Patents for inventions and copyrights for books are the best examples of such monopolies. The State grants to the inventors the sole right to enjoy their inventions.
(d) Voluntary Monopolies:
Sometimes with a view to increase profits a few firms voluntarily combine amongst themselves. The objectives of voluntary monopolies are to increase profits by avoiding competition amongst themselves. Trusts and cartels are such examples.