What factors allow a firm to have monopoly profits?

The factors that allow a firm to have monopoly profits are detailed below:

1. Economies of scale result in the downward-sloping portion of a firm's long-run average total cost curve (LRATC), permitting lower average costs to be achieved as the firm increases its size. A barrier to entry exists when economies of scale are extensive and the LRATC curve declines over a very large range of output and the average total costs of a large firm on SRATC1 are substantially lower than the average costs faced by a smaller firm on SRATC2. The large firm can charge a lower price than the smaller firm, and can force the smaller firm into a situation where it will not be able to cover its costs. Therefore, if new firms try to enter the industry on a small scale they will be unable to compete with the larger one, allowing the larger firm to capture the market and make monopoly profits.

2. Branding

Branding involves the creation by a firm of a unique image and name of a product. It works through advertising campaigns that try to influence consumer tastes in favour of the product, attempting to establish consumer loyalty. If branding of a product is successful, many consumers will be convinced of

the product's superiority, and will be unwilling to switch to substitute products, even though these may be qualitatively very similar. Branding may work as a barrier to entry by making it difficult for new firms to enter a market that is dominated by a successful brand. Note that branding need not lead to a monopoly (it is a method used by firms in monopolistic competition and oligopoly, as we will discover below), but it does have the effect of limiting the number of new competitor firms that enter a market. Examples of branding include brand-name items (such as NIKE®, Adidas®, CocaCola®, etc.)

3. Legal barriers

Legal barriers include the following:

• Patents -Patents are rights given by the government to a firm that has developed a new product or invention to be its sole producer for a specified period of time. For that period, the firm producing the patented product has a monopoly on the product. Examples include patents on new pharmaceutical products, Polaroid and instant cameras, Intel and microprocessor chips used by IBM computers.

• Licences- Licences are granted by governments for particular professions or particular industries. Licences may be required, for example, to operate radio or television stations, or to enter a particular profession (such

as medicine, dentistry, architecture, law and others). Such licences do not usually result in a monopoly, but they do have the impact of limiting competition.

• Copyrights- Copyrights guarantee that an author (or an author's appointed person) has the sole rights to print, publish and sell copyrighted works.

• Public franchises- Public franchises are granted by the government to a firm which is to produce or supply a particular good or service.

• Tariffs, quotas and other trade restrictions limit the quantities of a good that can be imported into a country, thus reducing competition.

4.Control of essential resources

Monopolies can arise from ownership or control of an essential resource. A classic example of an international monopoly is DeBeers, the South African diamond firm, that mines roughly 50% of the world's diamonds and purchases about 80% of diamonds sold on open markets. Whereas it is not the sole diamond supplier, its large market share allows it to have a significant control over the price of diamonds. On a national level, an example is Alcoa (the Aluminum Company of America), which, following the expiration of patents in 1909, was able to maintain its monopoly position on the production of aluminium within the United States until the Second World War, because of its control of almost all the bauxite resources within the country. On a local level, professional sports leagues create a local monopoly by signing long-term contracts with the best players and securing exclusive use of sports stadiums. A local monopoly is a single producer/supplier within a particular geographical area. Local monopolies appear more commonly than national or international ones. For example, a local grocery store in a residential area located some distance from any other stores may be a local monopoly.

5. Aggressive tactics

If a large firm intending to make monopoly profits is confronted with the possibility of a new entrant into the industry, it can create entry barriers by cutting its price, advertising aggressively, threatening a takeover of the potential entrant, or any other behaviour that can dissuade a new firm from entering the market.