Causes of Monopoly. Barriers to Entry and Cost Advantages

The key element in preserving a monopoly is keeping potential rivals out of the mar­ket. One possibility is that some specific factors prevent the establishment of a new firm in the industry. Economists call such impediments barriers to entry. Some examples are:

1. Legal restrictions. The U.S. Postal Service has a monopoly position because Con­gress has given it one. Private companies that might want to compete with the postal service are prohibited from doing so by law. Local monopolies of various kinds are sometimes established either because government grants some special privilege to a single firm (for example, the right to operate a food concession in a municipal stadium) or prevents other firms from entering the industry (for in­stance, by licensing only a single local radio station).

2. Patents. A special, but important, class of legal impediments to entry are patents. To encourage inventiveness, the government gives exclusive production rights for a period of time to the inventor of certain products. As long as the patent is in effect, the firm has a protected position and is a monopoly. For example, Xerox had for many years (but no longer has) a monopoly in plain paper copying. In the United States the inventor of an item has the exclusive right to produce that product for 17 years. Thus, a monopoly can exist in an industry because a patent was obtained for a product by its inventor. The United Shoe Machinery Company held such a monopoly in certain important shoe making equipment until 1954, when the monopoly was broken under the antitrust laws

3. Control of a scarce resource or input. If a certain commodity can be produced only by using a rare input, a company that gains control of the source of that input and owns the entire supply of a necessary material needed to produce a product can establish a monopoly position for itself. Real examples are not easy to find. The Aluminum Company of America exercised such power until 1945, when its monopoly was also broken under the antitrust laws.

4. Deliberately-erected entry barriers. A firm may deliberately attempt to make entry difficult for others. One way is to start costly lawsuits against new rivals, sometimes on trumped-up charges. Another is to spend exorbitant amounts on advertising, thus forcing any potential entrant to match that expenditure.

Obviously, such barriers can keep rivals out and ensure that an industry is monopolized. But monopoly can also occur in the absence of barriers to entry if a single firm has important cost advantages over its potential rivals. Two examples of this are:

4. Technical superiority. A firm whose technological expertise vastly exceeds that of potential competitors can, for a period of time, maintain a monopoly position. For example, IBM for many years had little competition in the computer business mainly because of its technological virtuosity. Eventually, however, competitors began to catch up.

5. Economies of scale. If mere size gives a large firm a cost advantage over a smaller rival, it is likely to be impossible for anyone to compete with the largest firm in the industry.

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