3 Types of Monopoly - 7 Causes of Monopoly - BoyceWire

3 Types and 7 Causes
2/12/2020 3 Types of Monopoly | 7 Causes of Monopoly | BoyceWire
Contents
1. Types of Monopoly
1.1 Natural Monopolies
of Monopoly’s
1.2 State Monopolies
1.3 Un-natural Monopolies
2. Causes of Monopolies
2.1 High Costs Scare Competition
2.2 Low Potential Profits
2.3 Ownership of a key resource
2.4 Patents
2.5 Restrictions on Imports
2.6 Baby Markets
2.7 Geographic Markets
   
WRITTEN BY PAUL BOYCE | Updated 03 February 2020
When looking at the causes of monopoly, it is
important to first define what it is. The term
monopoly originates from the Ancient Greek
language. Monos, meaning “sole”. And Poleo,

meaning “sell”. Roughly translated, it means “Sole
Seller”. Any person or business who is the only
seller in the market could be classified as having a

monopoly.
Difference between Monopoly and

Monopolistic Competition
It is important to distinguish the difference between
a monopoly, and monopolistic power. In a
monopoly there is only one supplier in the market.

For example, AT&T had a US monopoly in phone
services throughout most of the 20th Century. This

is different from monopolistic power in a number of
ways.
The difference is that monopolistic power means a
company has monopoly like powers, but is not the

sole provider. In monopolistic competition, there are
many firms in the market, but they compete on
factors other than price. Examples include: Taxi’s,
Restaurants, or Hairdressing. ^
Monopolistic markets are also characterised by low

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3 Types of Monopoly | 7 Causes of Monopoly | BoyceWire
Contents
barriers to entry; something that is usually non-
existent in monopoly markets. This allows new firms
to easily come in and compete; in stark contrast to
monopolies.
3 Types of
2.4 Patents Monopolies
2.6 Baby Markets There are three types of monopolies: Natural, Un-
2.7 Geographic Markets natural, and State. All three have unique
characterisics and causes. So let us look at the 3
types of Monopolies below:
1. Natural Monopolies
A natural monopoly is called ‘natural’ because there
is no direct government involvement. This derives
from the fact that its creation originates from
variables that are not man made.
For instance, railways are a prime example example
of a natural monopoly. This is because the cost to

build another track would be over and above what a
competitor would make back in profit. Therefore,
other firms do not want to enter the market because
there is no profit to be made.
In short, natural monopolies exist because they are
able to provide a product or service at a lower cost
than two or more firms can. This occurs mainly due
to economies of scale. In some industries,

production is more efficient when one firm is
providing for the market.
2. State Monopolies
State monopolies are industries whereby the state
has full ownership. Notable examples include:
Postal services, utilities, television, and the supply

of money. These are usually controlled by the state
as they are deemed as ‘natural’ monopolies.
^
The aim of state ownership is to prevent price
gauging that private monopolies would participate
Contents in. As monopolies have greater power to dictate
1. Types of Monopoly prices, they may increase the cost to the consumer
1.1 Natural Monopolies over and above the market rate.

1.3 Un-natural Monopolies Some governments regulate these monopolies
2. Causes of Monopolies instead, but in many countries, there is strong
2.1 High Costs Scare Competitionpolitical will to have these controlled by the state. In
the UK for example, the re-nationalization of the
railways has become increasingly popular.
2.4 Patents
3. Un-natural Monopolies
2.6 Baby Markets
Un-natural monopolies are a combination of natural
and state monopolies. They are natural monopolies
in the traditional sense, but are re-enforced by the
state. Patents are a clear example of an un-natural

monopoly.
A private firm creates a new product. This may be

completely different to whatever is on the market. A
new medical drug for example may be able to

reverse the effects of Alzheimer’s. Nothing else is
available to the consumer. So this drug has a

monopoly within the market.
It is naturally occurring as it is the first and only

product on the market. However, this product is
given an artificially monopoly through the patent

system. For a certain period of time, this will be the
only product customers can buy.
7 Causes of
Monopolies
Monopolies can occur due to a number of factors.
Some may apply, some may not. With that said,
monopolies tend to erode over time; perhaps with

the exception of natural monopolies. Causes such
as patents, high entry costs, or low potential profits
may prevent competition today. However, they tend

not to last over the long-term.
^
1. High Costs Scare Competition
One cause of natural monopolies are barriers to
Contents entry. This is usually as a result of high costs.

Railroads are a well-known example.
To build a new station and railroad would cost
millions. High start-up costs are required. Potential
competitors would first have to have millions to
invest. Secondly, the profits they make may never
2.3 Ownership of a key resource cover the cost of their fixed investments.
2.4 Patents
2.5 Restrictions on Imports There are many industries that have high entry
2.6 Baby Markets costs. Oil and gas for example is notoriously
2.7 Geographic Markets expensive to enter, with high fixed costs and a
number of regulatory requirements. New companies

still enter the industry despite these high fixed
costs. However, this is because there is perceived
return on investment.
Monopolies are more common in industries that

have high fixed costs and steadily decreasing
marginal costs. If it costs $1 billion to start a new

tech company, that may be considered a high fixed
cost. To supply its service to 1 customer, the
marginal cost may be small, perhaps $10,000.
Therefore, the company requires the customer to

pay a massive price to cover its costs. However, at
50,000 customers, the marginal costs fall to $50 per
customer, making it cheaper to provide the service.

This may keep continually falling until the marginal
cost may actually reach $0.
In an industry such as that described, it is more

economically effective for one company to be in the
market. The most efficient company may end up

driving all other competitors out due to its economy
of scale; taking advantage of lower production costs
and outpricing the competition.
2. Low Potential Profits Are

Unattractive to Competitors
Potential profits are a key indicator to potential
businesses. If monopolies are making small profits, ^
it is not worth a competitor’s time and money to try
and take a small share of the market.
Contents
1. Types of Monopoly Both Apple and Google invested billions in
1.1 Natural Monopolies developing their operating systems in order to
compete with Microsoft. The cost barriers were
high, but the potential profits were also high.
Therefore, while costs are a barrier to entry; so too
2.2 Low Potential Profits are the potential profits.

2.4 Patents Further Reading:
2.6 Baby Markets
2.7 Geographic Markets What is 3 Types The
Inflation of Money Importan
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As Milton 1.
Property
Friedman Commodity
said; Money, 2.
Rights
‘Inflation is Fiat Money,
An efficient
and will 3.
free market
always be a Commercial
relies on
monetary Bank Money
strong
phenomeno
property
n.’ Read
rights as a
More
fish is to
Read
water
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Read
More
If monopolies start making extraordinary profits, this

sends a signal to potential competitors that there is
profit to be made. For example, it may cost $1
billion to develop a new operating software. If
Microsoft only makes $200 million a year, then there
is not much profit for competitors to take.
However, if Microsoft tries to take advantage of

consumers and profits $1 billion each year; there
may be room for competition. Companies may be
able to come in, invest $1 billion, and take a share
of those profits.
When there are low profits, the monopolist’s
position is maintained as competitors are dis-

interested. If we look to nature for an example; a
lion would not waste its effort pursuing beetles or ^
shrew. They are too small and not worth the energy
in catching.
Contents
1. Types of Monopoly 3. Ownership of a key resource
1.1 Natural Monopolies Monopolies can arise when one business owns a
1.2 State Monopolies key resource. These are generally physical
resources, such as diamonds. For example, if there
is only one diamond mine in the country, the
business that owns it will be able to achieve a
2.3 Ownership of a key resource monopoly. This is how De Beers controlled the
2.4 Patents diamond industry throughout the 20th Century.
2.6 Baby Markets It controlled diamond mines in South Africa and
2.7 Geographic Markets brought up those in other nations. It managed to
keep control of the diamond supply for most of the
20 th Century, only collapsing once international
competition became increasingly fierce.
“Monopolies can arise when

one business owns a key
resource. “
The National Grid in the UK is also a monopoly that

has sole ownership of a key resource. It has power
over the whole of the UKs energy supply. While it is
a publicly traded company, it is held down by

government regulation to prevent consumers from
being in-directly overcharged.
When companies have sole ownership of a key

resource, they are usually heavily regulated by
government. This is so that they do not take
advantage of their monopolistic position in the
market.
4. Patents
Monopolies can arise when governments grant a
patent to businesses. This is a form of intellectual
property that gives the owner the legal right to be
the sole producer of a product.
The owner of the patent must provide details of the

product and make them public. In exchange, the ^
government guarantees the protection of such rights

in court for a period of time Any business infringing
in court for a period of time. Any business infringing
Contents
on this right will be in violation of the patent and can
be sued.
While this grants the inventor a monopoly, it is
designed to incentivise innovation. If the inventor of
2.1 High Costs Scare Competitiona product knew there was no legal production, they
2.2 Low Potential Profits may not invest the time, energy, and funds into
2.3 Ownership of a key resource developing it. There is little incentive for the
2.4 Patents
inventor if they know the product will be copied by
Mr Bloggs the very next day.
2.6 Baby Markets
5. Restrictions on Imports
Import quotas, tariffs, and other trade restrictions
can limit domestic competition. In some cases, this
can create monopolies. If cheaper foreign
competition is unable to enter the market, there are
fewer pressures on domestic companies.
For example, when the patent of a small niche drug

runs out; there may be few pharma companies that
would want to compete. There is therefore a

domestic monopoly.
However, foreign drugs would be able to compete,

but many countries prevent this. In the US for
example, only drugs approved by the FDA can
enter. This stops perfectly safe drugs from Europe
coming in and serving as a competition to the

domestic monopoly.
6. Baby Markets
During the infancy of a market, the first entrant will
be able to establish an initial monopoly position.
For example, if a business was to create a

hypothetical teleportation device, it would be the
first to do so. In the early stages at least, it may
have a monopolistic position. Until competitors are

able to enter and create a similar product, it will
have a monopoly.
During these initial stages of a new market, it is

^
easy for the first entrant to establish a monopoly.
This usually does not last long as other competitors
Contents see an opportunity.

1.1 Natural Monopolies 7. Geographic Markets
1.2 State Monopolies Geographic monopolies can be characterised by the
sole presence within a local market. For example,
there may only be one restaurant in the local town.
If you want a meal out, you may have to travel half
2.3 Ownership of a key resource an hour to the nearest restaurant. When considering
2.4 Patents the local market; it can be considered as a
2.5 Restrictions on Imports monopoly.
2.6 Baby Markets
2.7 Geographic Markets Other examples of local monopolies may include a
gas station that is the only supplier on the
motorway. Whilst it does not have a monopoly over
gas, it does within the bounds of its location.
Further Reading
Substitute Goods Real GDP | Definition | Universal Basic Income

Definition Formula will be a disaster
A substitute good is not necessarily just a So what is Real GDP? It’s a rather Universal Basic Income is a disaster
physical product; it can also be a service. convoluted term for a relatively simple waiting to happen The case for a Universal
So to define substitute goods: it is a definition. Simply put, Real GDP is just Basic Income (UBI) is a strong one, in
product or service that is used in place of Gross Domestic Product (GDP) that some ways. A UBI would stimulate
another. … accounts for inflation or deflation. … aggregate demand, help those affected by
Read More » Read More » technological change, and create a basic…
…
Read More »
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2.6 Baby Markets

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3 Types and 7 Causes

2/12/2020 3 Types of Monopoly | 7 Causes of Monopoly | BoyceWire

WRITTEN BY PAUL BOYCE | Updated 03 February 2020

When looking at the causes of monopoly, it is

important to first define what it is. The term

monopoly originates from the Ancient Greek

language. Monos, meaning “sole”. And Poleo,

seller in the market could be classified as having a

Difference between Monopoly and

monopoly there is only one supplier in the market.

services throughout most of the 20th Century. This

The difference is that monopolistic power means a

company has monopoly like powers, but is not the

factors other than price. Examples include: Taxi’s,

Monopolistic markets are also characterised by low

types of Monopolies below:

from the fact that its creation originates from

variables that are not man made.

For instance, railways are a prime example example

of a natural monopoly. This is because the cost to

competitor would make back in profit. Therefore,

other firms do not want to enter the market because

there is no profit to be made.

In short, natural monopolies exist because they are

able to provide a product or service at a lower cost

than two or more firms can. This occurs mainly due

to economies of scale. In some industries,

providing for the market.

Postal services, utilities, television, and the supply

gauging that private monopolies would participate

Contents in. As monopolies have greater power to dictate

1.1 Natural Monopolies over and above the market rate.

state. Patents are a clear example of an un-natural

A private firm creates a new product. This may be

new medical drug for example may be able to

available to the consumer. So this drug has a

It is naturally occurring as it is the first and only

given an artificially monopoly through the patent

monopolies tend to erode over time; perhaps with

may prevent competition today. However, they tend

Contents entry. This is usually as a result of high costs.

number of regulatory requirements. New companies

Monopolies are more common in industries that

marginal costs. If it costs $1 billion to start a new

marginal cost may be small, perhaps $10,000.

Therefore, the company requires the customer to

customer, making it cheaper to provide the service.

In an industry such as that described, it is more

market. The most efficient company may end up

2. Low Potential Profits Are

2.3 Ownership of a key resource

If monopolies start making extraordinary profits, this

is not much profit for competitors to take.

However, if Microsoft tries to take advantage of

When there are low profits, the monopolist’s

position is maintained as competitors are dis-

“Monopolies can arise when

The National Grid in the UK is also a monopoly that

a publicly traded company, it is held down by

When companies have sole ownership of a key

The owner of the patent must provide details of the

government guarantees the protection of such rights

For example, when the patent of a small niche drug