Ex. 5. Speak on the content of the text. Unit 22 Foundations of Monopoly Power

A monopolist is the sole supplier of a good for which there are no very close substitutes? And can exclude competitors. His control over the supply of a good may be either in its production or sale. His control over the supply of a good may be either in its production or sale. The sources of this power can be classified under four main headings:

I. Immobility of the Factors of Production

Immobility of the factors of production means that new competitors cannot compete with existing suppliers. Such immobility may arise through:

(a) Legal prohibition of new entrants. In the seventeenth century James I granted monopolies as a means of raising revenue, but today prohibition of entry of new firms is chiefly confined to certain "public utility" undertakings, e.g. water supply, natural gas transmission, and some public corporations, e.g. coal-mining, letter delivery (Post Office), where many firms would create technical difficulties.

(b) Patents, copyrights and trademarks, with the object of promoting invention and the development of new ideas.

(с) Government policy of establishing single buying and selling agencies, e.g. marketing boards.

(d) Control of the source of supply by one firm, e.g. diamonds, mineral springs, special workers (e.g. dress-designers), trade unions and professional associations.

(e) Restriction on imports, by tariffs, quotas, health controls, etc.

II. Ignorance

A monopoly may persist largely through the ignorance of possible competitors. They may not know about the supernormal profits being made by the existing firm, or they may be unable to acquire the necessary know-how, e.g. for involved technical processes.

III. Indivisibilities

Whereas the original firm may have been able to build up its size gradually, new firms may find it difficult to raise the large capital required to produce on a scale which is cost-competitive, e.g. with cars, drugs, computers.

In some cases, too, the efficient scale of plant may be so large relative to the market that there is only room for one firm. These "natural" monopolies cover many of the public utilities, e.g. gas supply, water, electricity generation.

IV. A Deliberate Policy of Excluding Competitors

Restriction of competition falls into two main groups. On the one hand, we have the sources of monopoly power described so far. These have, as it were, resulted indirectly rather than from any deliberate action by producers. Such "spontaneous" monopolies must be contrasted with "deliberate" monopolies – those which are created specifically to restrict supply.

Deliberate action to exclude competitors takes various forms. Firms producing or selling the same good may combine, or a competitor may be subject to a takeover bid. Monopolies are often formed in the sale of services. Trade unions are primarily combinations of workers formed with the object of obtaining higher wages. Certain professions, such as medicine and the law, have their own associations which regulate qualifications for entry, professional conduct, and often the fees to be charged.

Some practices designed to exclude competitors are highly questionable – vicious temporary price-cutting, collusion in submitting tenders, collective boycotts, intimidation of rivals' customers by threats to cut off the supply of another vital product, etc.