5. A monopoly can only continue to exist if other firms are prevented from entering the market. Monopolies are protected from competition by what are known as ‘barriers to entry’. These are described below.
2.2.2 How monopolies are created
· By law
The government can grant monopoly powers to a firm by making it illegal for other firms to enter the industry. Most of the nationalized industries are legal monopolies. The law can also grant the holders of patents the sole right to supply the products they have patented.
· By competition
Fierce competition will drive the weaker and less efficient firms out of an industry. It is possible that, eventually, one firm could come to dominate a whole industry.
· By mergers and amalgamations
When an industry is made up of a few relatively large firms, a series of mergers or take-over could lead to a monopoly situation,
· By forming a cartel
A cartel is created when the individual firms in an industry make an agreement to restrict their outputs to some agreed amounts, and to charge a common price. The Organization of Petroleum Exporting Countries (OPEC) is a form of cartel, and so is the Milk Marketing Board in the UK.
· By ownership of scarce resources
Where the workable deposits of certain minerals are concentrated in a particular region, the owners of such deposits will have considerable monopoly power. This is the case with gold deposits in South Africa.
2.2.3 Monopoly and the barriers to entry
It has already been noted that a firm can only hold a monopoly position if other firms are prevented from competing with it. The barriers which prevent other firms from competing with it. The barriers which prevent other firms from entering the industry can take several forms.
· The law
This was explained in the previous section.
· Economies of scale
A very large firm may be protected from competition by the sheer size of its operations. Large-scale production may enable it to produce at very low average cost. Any new firm thinking of entering the same industry would find it difficult or impossible to achieve such a low average cost. It would be unlikely to have the resources or be prepared to take the risks of starting production on the same scale as the existing firm.
The products of some large firms have well-established brand names whose familiarity is maintained by continuous and expensive advertising. It is difficult for new firms to enter these markets because they would have to undertake very costly advertising campaigns in order to establish a new brand name.
As explained above, owners of scare and valuable mineral deposits are protected from competition until some new deposits are discovered or some substitute product is invented. For example, the monopoly powers of OPEC were seriously weakened by the discovery of new oilfields.
· Restrictive trade practices
The existing firms in an industry may act together so as to make it difficult for new firms to enter the industry. For example, manufacturers may form an association and make agreements with wholesalers and retailers whereby these distributors will only stock the goods made by the existing manufacturers. Any new firm trying to compete with the existing firms would find it very difficult to, market its products. This type of agreement is now illegal in the UK.
2.4.2 Some arguments for monopoly
1. In some industries, competition would lead to a wasteful duplication of capital equipment. The most obvious examples are in the distribution of gas, electricity, water and telephone services. Competition would mean the installation of several competing networks of pipes or cables.
2. In many industries, large dominant firms will be able to obtain economies of scale which could not be achieved by small competing firms. The fact that a monopoly can produce at lower cost, however, does not necessary mean that prices will be lower: it could mean higher profits.
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