Get the answer of: Why Does Monopoly Business Arise?
1. Firstly, the size of the market or the nature of production may be such that it does not permit the setting up of more than one firm in the industry. In particular, economies of scale are so important that only one firm can produce entire output. If this particular firm is capable of producing goods at lower average cost compared to two or more firms, the market creates ‘natural monopoly’.
For instance, a minibus in a particular route carries 30 passengers per round trip. Suppose there are 300 passengers in a day. Thus, 5 buses are required to be employed to transport 300 people daily. But all the 5 bus owners may find it unprofitable to serve the same route.
In other words, it is the narrowness of the market that prevents all the buses to run profitably. If, instead, one bus owner is given the route permit, he could make profit. A monopoly firm with a very large minimum efficient scale can deliver services at lower average cost. This case is known as natural monopoly.
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Usually, the government behaves as a natural monopolist who undertakes the production of public utilities, like electricity generation, railways, etc. Because of indivisibilities of inputs of public goods, the government enjoys the power of a natural monopolist.
2. Secondly, control or ownership over crucial raw materials or knowledge of a low cost production technique may allow monopoly business to stay.
Such control over the resources often discourages other firms to start new business, thereby shutting out competition. Or it may exhibit decreasing marginal costs over a wide range of output levels due to ownership of unique resources or the possession of unique managerial talent.
3. Thirdly, patents, copyrights and trademarks allow a monopolist to produce a specified commodity. This prevents other firms from producing the good without the permission of the patent-holder or the copyright-holder.
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In other words, the source of monopoly power is some sort ‘control over intellectual property’, that is, ‘property over inventions or expressions’. In view of this, patent right is given to the monopoly inventor that may guarantee an exclusive market power.
Finally, the government may protect the monopolist by creating tariff wall with the objective of eliminating foreign competition. A high tariff discourages new firms to start new business.
Anyway, for the existence of a monopoly firm or industry, there must be barriers to entry.