Q. 4.6. • Describe the various ways in which a monopoly market structure may arise.

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How does a monopoly market structure arise?

A monopoly market structure emerges due to any of the following reasons (called sources of monopoly).

(i)    Grant of Patent-rights. When a company/firm introduces a new product or new technology, it applies to the government to grant it Patent Certificate by which it gets exclusive right to produce the new product or use the new technology. Patent-rights prevent others to produce the same product or use new technology without obtaining licence from the concerned company. Thus a patent offers a kind of limited monopoly. Patent-rights are granted by the government for a certain number of years. The period for which patent-right is valid is called patent-life. Thus patent-life indicates duration for which patent-right is valid. For instance, patent certificate was granted to 'Zerox' company for copying machine invented by it thereby giving rise to monopoly. Likewise it is also a case of monopoly of an author when he has copyright of his book.

Patent-right is an exclusive right granted to a firm to produce a particular product or use a particular technology on the basis of its claim to be the discoverer of the product or the technology. It is to give official recognition to the fact that the company (firm) is the originator of the new product or technology and no one else can use its technology without obtaining licence from the company. Clearly nobody will undertake the risk of making investment in research and discovery if it does not get its fruits. In a way patent-right is a reward for undertaking risk and making investment in research. Thus motivation behind granting patent-rights is to encourage innovation, discovery and to make investment in research.

(ii)    Licensing by Government. A monopoly market emerges when government gives a firm licence, i.e., exclusive legal rights to produce a given product or service in a particular area or region. For instance, Delhi Vidyut Board — a government body — had the exclusive right to distribute electricity in Delhi. Now after privatisation, the same rights have been given to two private companies with exclusive areas to serve. Similarly till recently Videsh Sanchar Nigam Limited (VSNL) had monopoly in India to provide international telephone service.

(iii)    Forming a Cartel. Sometimes individual firms while retaining their identities, unite into a group and coordinate their outputs and pricing policy in such a way as to reap the benefits of monopoly. Such formation is called a Cartel. Thus a cartel is a business combination under which firms coordinate their output and pricing policy to reap benefits of monopoly. In the words of A.C. Pigou, 'Combination is the most important factor which leads to emergence of monopoly'. To quote an example, in 1970 some oil producing companies formed a cartel by the name of OPEC (Organisation of Petroleum Exporting Companies) which sets production quotas for member states and thereby tries to manipulate price of petroleum to derive highest possible profit. A cartel is a group of firms which jointly sets output and price so as to exercise monopoly power.

Efficiency may increase when two firms merge. How? Let us imagine that firm A and firm B merge with each other. Firm A is not efficient because of its obsolete technology and firm B is inefficient because its managerial skill is poor. In case they form a monopoly by merging themselves, efficiency will increase in the form of lower cost because it will collectively make use of better technique of production and better managerial skill.

(iv) Miscellaneous. (i) Full control by a firm over an essential raw material used in production of a commodity leads to monopoly power (ii) Certain industries like locomotives, iron and steel which require heavy investments generally attain monopoly power. (iii) Government itself forms public monopolies like Railways, Posts and Telegraph, Air Transport etc. in order to safeguard the interests of the public and promote social welfare.