Page 169 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes

Notes Sources of Monopoly
1. Legal Restrictions: Some public sector services are statutory monopolies, which
means their position is protected by law.

A monopoly position might also be protected by a patent which prevents other fi rms
from producing an identical good during the life of the patent. However, similar
products can often be produced and it is easy to exaggerate the protection afforded
by patents.
2. Capital Costs: Certain businesses, such as international airlines and chemical
companies, have relatively high set-up costs. In such cases the minimum effi cient
scale of production might be very high indeed and this creates a formidable barrier
to entry.
3. Natural Factor Endowments: Sometimes firms, within a particular country, between

them control a major proportion of the world output of a commodity: nitrates from
Chile, coffee from Brazil and gold from South Africa are cases in point. A particular
country has a monopoly in the supply of a particular commodity due to natural
factor endowments and it is impossible to obtain supply of the commodity from any
other source.

4. Tariffs and Quotas: It can happen that a firm has a dominant position in its
home country, but faces competition internationally. A tariff raises the price of
goods imported into the domestic economy and a quota restricts the volume that
can be imported. They, therefore, protect domestic industry from international
competition.

11.2 Types of Monopoly

Economists differentiate between different types of monopolies based on why the monopoly
exists, such as where the barrier to entry for new companies comes from, which could be high
entry costs or legal restrictions.

1. Naturalmonopoly: A natural monopoly occurs when the type of industry makes it fi nancially
impractical, if not impossible, for multiple companies to engage in the business.

Example: If you had multiple companies attempting to offer sewage services, that

would require multiply sewer lines running to homes which is financially – and likely
spatially – impossible. This makes the sewage industry a natural monopoly.
2. Private monopoly: The monopoly firm owned and operated by private individuals is

called the private monopoly. Their main motive is to make profi t.
3. Absolute monopoly: It is a type of monopoly, where a single seller controls the entire supply
of market without facing competition. It is also known as pure monopoly. His product
does not have even any remote substitute also.
4. Imperfect monopoly: It is a type of monopoly in which a single seller controls the entire
supply of the market which does not have a close substitute. But there might be remote
substitute for the product available in the market.
5. Geographic monopoly: Geographic monopolies occur when there is only one company that
offers a particular good or service in an area.

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