Monopoly is a situation wherein a single entity owns either nearly all or all of the market for a particular kind of service or product. This happens in situations where a barrier exists for entrance into the industry, which permits the single entity to operate in the absence of competition. In this type of industrial structure, the products manufacturer will mostly produce a volume which is lesser in comparison to the amount that would enhance social welfare.
Simply put, a monopoly is a market where only one particular seller exists and there are no substitutes for the products sold by the seller.
Why Monopolies Occur?
Monopolies occur as a result of the barriers for entering, which stops other entities from making an entry into the market and exercising competitive force on the monopolist. The barriers are present in different forms. Some of the economists are of the opinion that the market must be left entirely upon the government and in case there is a formation of monopoly, then that should be considered as the market’s will and no one should meddle with it. Many of the economists, including those that want less governmental interference in private markets, accept the fact that in certain special cases an anti-monopoly legal ruling is completely necessary.
Monopolies occur in different ways including:
- A market converts into a monopoly in cases where one particular entity has complete control of a given resource, which is required for the manufacturing of the product for that particular market.
- Monopolies that are enforced legally on a given market, for example, Copyrights and Patents create monopolies in a legal way on services and products.
- Natural monopolies arise when the cost associated with building a network of distribution makes the cost of building more than one network uneconomic.
- When former competing organizations cooperate with each other on prices and market share.
- Owing to network effects, which can help in creating monopoly and also make it very difficult to dislodge the network once it has been established.
- When a retailer purchases the best of the locations for the purpose of distributing a specific product in a specific area then they can exercise control over the competitors and not allow them to access customers in the market.