Economies of Scale
Modern technology in some industries is such that it permits extension of economies of scale- declining ATC (average total cost). So a firm’s production price will decline if a wide range of output is produced. Given a market demand, only a few large firms, or even a single one, can achieve low average total costs. When long-run ATC is declining only a single producer, a pure monopolist will be able to produce any particular output at minimum total cost.
If pure monopoly exists in an industry, then economies of scale will serve as entry barriers and will protect the monopolist from competition. New firms will try to enter the industry as small-scale producers but they won’t be able to produce the output at that small price produced by monopolists, so these small firms won’t be able to obtain normal profits needed for survival. A new firm might try to enter as a big producer, but the massive plant output will require very huge amount of financing, which for a new and untried firm will be very difficult to get. In most cases the financial obstacles and risks to start a big business are hinders, that’s why entering in a pure monopoly market system is rarely successful.
There may be some cases in which market demand curve is cutting long-run ATC curve in a point where ATC curve is still declining we say that in this case a natural monopoly exists. So if ATC curve is declining we might say that this firm may set a lower price for its products, but this doesn’t really happen. Conversely, a natural monopolist might set its product’s price far above ATC, so that it obtains an economics profit, that’s why government has to regulate price charged by natural monopolists.
A patent is investor’s right to use his or her own invention. Patent and patent’s law protects inventor from rivals who use the invention without helping with expenses or effort at developing it.
Research and development is what provides our world with new amazing inventions. Firms may get monopoly power by researching or purchasing patents from other firms so they may strengthen current market position.
The profit from one patent can finance the research for other patentable products. So, monopoly power achieved through patents may self-sustain firm, even if they eventually expire.
Government may limit entry into an industry by licensing. In a country only a small number of licenses for telephone operators may exist. That’s why new telephone operators can’t enter this industry. In some cases government may license itself at providing some products and that’s how it creates a pure monopoly.
A monopolist may use private property as an obstacle to eliminate rivals. So a firm that controls an important resource needed for production of a specific good may effectively block entry of new rival firms.
In some cases a monopolist may create entry barriers by cutting products’ prices, stepping up advertising, or taking other strategic actions to make entrance for a new firm difficult.