How can monopolies be beneficial

Each of these factors contributes to reductions in the long-run average cost of production. Economies of Scale : Large firms obtain economies of scale in part because fixed costs are spread over more units of output. A natural monopoly arises as a result of economies of scale. For natural monopolies, the average total cost declines continually as output increases, giving the monopolist an overwhelming cost advantage over potential competitors. It becomes most efficient for production to be concentrated in a single firm.

Network externalities also called network effects occur when the value of a good or service increases as a result of many people using it. Because of network effects, certain goods or services that are adopted widely will appear to be much more attractive to new customers than competing goods or services. This is evident in online social networks. Social networks with the largest memberships are more attractive to new users, because new users know that their friends or colleagues are more likely to be on these networks.

It is also evident with certain software programs. For example, most people use Microsoft word processing software. While other word processing programs may be available, an individual would risk running into compatibility problems when sending files to people or machines using the mainstream software.

This makes it difficult for new companies to enter the market and to gain market share. There are two types of government-initiated monopoly: a government monopoly and a government-granted monopoly. There are instances in which the government initiates monopolies, creating a government-granted monopoly or a government monopoly.

Government-granted monopolies often closely resemble government monopolies in many respects, but the two are distinguished by the decision-making structure of the monopolist. In a government-granted monopoly, on the other hand, the monopoly is enforced through the law, but the holder of the monopoly is formally a private firm, which makes its own business decisions. In a government-granted monopoly, the government gives a private individual or a firm the right to be a sole provider of a good or service.

Potential competitors are excluded from the market by law, regulation, or other mechanisms of government enforcement. Intellectual property rights such as copyright and patents are government-granted monopolies.

Additionally, the Dutch East India Company provides a historical example of a government-granted monopoly. It was granted exclusive trading privileges with colonial possessions under mercantilist economic policy.

In a government monopoly, an agency under the direct authority of the government itself holds the monopoly, and the monopoly is sustained by the enforcement of laws and regulations that ban competition or reserve exclusive control over factors of production to the government. The state-owned petroleum companies that are common in oil-rich developing countries such as Aramco in Saudi Arabia or PDVSA in Venezuela are examples of government monopolies created through nationalization of resources and existing firms.

The United States Postal Service is another example of a government monopoly. It was created through laws that ban potential competitors from offering certain types of services, such as first-class and standard mail delivery. Around the world, government monopolies on public utilities, telecommunications systems, and railroads have historically been common.

Postal Service : The postal service operates as a government monopoly in many countries, including the United States. The government creates legal barriers through patents, copyrights, and granting exclusive rights to companies.

In some cases, the government will grant a person or firm exclusive rights to produce a good or service, enabling them to monopolize the market for this good or service. Intellectual property rights, including copyright and patents, are an important example of legal barriers that give rise to monopolies. Copyright gives the creator of an original creative work such as a book, song, or film exclusive rights to it, usually for a limited time, with the intention of enabling the creator to be compensated for his or her work.

The intent behind copyright is to promote the creation of new works by providing creators the opportunity to profit from their works. The copyright holder receives the right to be credited for the work, to determine who may adapt the work to other forms, who may perform the work, and who may financially benefit from it, along with other related rights. When the copyright on a work expires, the work is transferred to the public domain, enabling others to repurpose and build on the work.

Copyright : Copyright is an example of a temporary legal monopoly granted to creators of original creative works. A patent is a limited property right the government gives inventors in exchange for their agreement to share the details of their invention with the public. During the term of the patent, the patent holder has the right to exclude others from making, using, or selling the patented invention. The patent provides incentives 1 to invent in the first place, 2 to disclose the invention once it is made, 3 to make the necessary investments in research and development, production, and bringing the invention to market, and 4 to innovate by designing around or improving upon earlier patents.

When a patent expires and the invention enters the public domain, others can build on the invention. For example, when a pharmaceutical company first markets a drug, it is usually under a patent, and only the pharmaceutical company can sell it until the patent expires.

This allows the company to recoup the cost of developing this particular drug. After the patent expires, any pharmaceutical company can manufacture and sell a generic version of the drug, bringing down the price of the original drug to compete with new versions.

It is also possible that there is a monopoly because the government has granted a single company exclusive or special rights. The water utility company, for example, is a monopoly in your area because it is the only organization granted the right to provide water. Another example is that the Digital Millenium Copyright Act the proprietary Macrovision copy prevention technology is required for analog video recorders.

Natural monopolies occur when a single firm can serve the entire market at a lower cost than a combination of two or more firms. Natural monopolies occur when a single firm is able to serve the entire market demand at a lower cost than any combination of two or more smaller firms. The total cost of the natural monopoly is lower than the sum of the total costs of two firms producing the same quantity.

Along with this, the average cost of production decreases and then increases. Instead, they own the means of connection. Standard Oil, Facebook is not. While these platform companies do have significant market power in their industries, they don't control their users in the same way that Standard Oil controlled its sources of production. Alibaba can't just flip a switch and change the output of its sellers.

It controls its market, but it does so only indirectly by providing value to its merchants and consumers. Additionally, today's platforms are competitive in a way older monopolies were not. As a result, modern monopolies can rise and fall from the iron throne much faster than the industrial monopolies of the 20th century. For modern monopolies, life is less Downtown Abbey and more Game of Thrones.

There's always a new competitor ready to cross the sea and steal your users. For new tech startup founders and investors, that's great news. They can become billionaires and create the next great modern monopoly within a few years time. Look at Instagram founder Kevin Systrom, who sold his company for a billion dollars while it employed only 11 people. For users, this competition is great news too. New platforms are creating entirely new categories of economic and social activity and value. Imagine trying to connect with your college friends before Facebook, connecting with celebrities every day online before Twitter or Snapchat, or selling your old belongings online before eBay.

In developing countries, where the infrastructure of commerce is less established, the contributions of platform companies are even more pronounced. It wouldn't be an exaggeration to say that Alibaba along with fellow Chinese platform companies like Baidu and Tencent has built much of the core infrastructure of modern commerce in China. Now, this is not to suggest that platforms can do no wrong. Regulators should and do pay close attention to these businesses to make sure they don't abuse their market power.

But the types of regulations that worked for monopolies of old aren't likely to work for these modern monopolies. In many cases, platforms have very good reasons for governing their networks in ways that would traditionally be considered anti-competitive. And yet, at the level of individual product markets in detergents, as well as in personal hygiene products, shampoos, and toothpastes, concentration has declined and competition has increased, the researchers find.

Similar patterns can be seen in other markets including food and financial services, according to the study. In total, the researchers looked at consumer product markets using the Herfindahl-Hirschman Index—a standard measure of the size of companies relative to the industry they operate in—to assess concentration at the market and product levels over time.

Industries with HHIs between 1, and 2, are considered moderately concentrated, with anything above 2, being highly concentrated. The researchers hypothesize that this effect could be driven by economies of scale and greater efficiencies in processes and operations as large companies consolidate their presence and integrate expertise and know-how from the smaller firms they acquire.

Superior access to research and development and emerging technologies may also have a role to play in streamlining production and manufacturing—a benefit that seems to be making its way across conglomerates and their roster of owned brands and into the pockets of US consumers. This has implications for US legislators concerned about rising concentration. To date, the understanding of the full dynamics at play within the US antitrust context has been incomplete, the researchers argue.