Natural Monopoly

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  • Topic: Monopoly, De Beers, Government-granted monopoly
  • Pages : 10 (2789 words )
  • Download(s) : 120
  • Published : January 21, 2013
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REPORT

ON

MONOPOLY: SOURCES AND EXAMPLES

CONTENTS

1) AREA OF STUDY

2) METHOD OF STUDY

3) MAJOR REASONS OF MONOPOLIES

4) OWNERSHIP OF KEY RESOURCE : DE BEERS EXAMPLE

5) GOVT. OWNED STRATEGIC RESOURCES: CIL EXAMPLE

6) PATENTS IN DRUG INDUSTRY

7) NATURAL MONOPOLY: INDIAN RAILWAYS EXAMPLE

8) CONCLUSION

9) REFERENCES

Area of study:
This report studies what are the various sources of monopoly and real life examples for each source. It analyses how each of these businesses grew into a monopoly and substantiates the analysis with actual facts & figures (wherever available).

Methodology of study:
The subject has been divided into sub-topics based on the source out of which the monopoly arises. The report begins with the introductory analysis of the monopoly functioning. Each source has then been studied with reference to one real life example followed by the conclusion. What defines a Monopoly – Its Characteristics:

Profit Maximizer, Price Maker, High Barriers to Entry, Single seller, Price Discrimination: Major sources of monopolies:
1. Ownership of strategic resources: A monopoly is likely to arise if a firm has complete control over a key input or resource used in production. Famous example is diamond trade monopoly firm De Beers. 2. Government regulations: A government-granted monopoly (also called a "de jure monopoly") is a form of coercive monopoly by which a government grants exclusive privilege to a private individual or company to be the sole provider of a commodity. Potential competitors are excluded from the market by law, regulation, or other mechanisms of government enforcement. 3. Patents: Patents grant the inventor the exclusive right to produce a product for 20 years (new worldwide patent period established with a 1995 GATT agreement). By granting the right to produce a new product without fear of competition, patents provide incentive for companies or individuals to continue developing innovative new products or services. For example pharmaceutical companies spend large sums on research and development and patents are essential to earning a profit. 4. Natural monopoly: A natural monopoly is a company that experiences increasing returns to scale over the relevant range of output and relatively high fixed costs. A natural monopoly occurs where the average cost of production declines throughout the relevant range of product demand. When this situation occurs, it is always cheaper for one large company to supply the market than multiple smaller companies. An early market entrant that takes advantage of the cost structure and can expand rapidly can exclude smaller companies from entering and can drive or buy out other companies. Monopoly through ownership of key resource: De Beers

Diamonds are one of the worlds, and specifically Africa’s, major natural resources. An estimated US$13 billion worth of rough diamonds are produced per year, of which approximately US$8.5 billion are from Africa (approximately 65%). Global diamond jewellery sales continue to grow, increasing three-fold in the past 25 years, and are currently worth in excess of US$72 billion every year. Chronology over which DeBeers has become one of the world’s most powerful monopolies:1. Ownership of all South African diamond mines: Smaller groups needing common infrastructure form diggers committees and small claim holders wanting more land merge into large claimholders to form larger ones. In no time, it could establish De Beers consolidated mines.

2. Supply and Demand control: "The Diamond Trading Company" has been formed. The mantra is: Create a scarcity of diamonds and high prices will follow. And while other commodities have seen price fluctuations over the years, diamonds prices have climbed since the Great Depression mostly. Demand has also been...
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