(a) Explain the economic factors which may encourage the formation of a monopoly. [10 marks]
. a definition of monopoly
A type of market dominated by a single firm who sells a unique product. The formation of a monopoly is usually
due to high barriers that prevents competitors from entering this market.
. an explanation of natural barrier
For instance the industry has high overhead costs which results in large amount of economies of scale. This
makes hard for new firms to enter that market, resulting in a single firm dominating this market. THis is usually in
cases of natural monopoly like public transport, since transport networks are really expensive.
Exclusive control of necessary resources/factor endowment also leads to formation of high barriers to entry.
Governments usually own land and capital like electricity provision facilities or water provision, and make them
state run monopoly
. an explanation of artificial
. the possibility of product differentiation and/or branding
. mention of a legal framework in which merger and acquisition is permissible, or where government may grant
exclusive rights, patents and privileges
. predatory pricing; firm cuts prices low in cases when potential competitors try to enter the market
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