Final answer:
Monopolies exist due to natural monopolies, government actions, and barriers to entry such as control of resources and legal restrictions. Natural monopolies, such as public water services, are more efficient under a single supplier, and government monopolies may arise from exclusive rights like patents. These exclusivities protect innovation but can also lead to market dominance by one or a few firms.
Step-by-step explanation:
Reasons for the Existence of Monopolies
A monopoly exists when a single supplier has exclusive control over a commodity or service in a market. The reasons for the existence of a monopoly include several factors, such as natural monopolies, government monopolies, and control of resources. In a natural monopoly, it's more efficient for one large firm to supply all of the output due to significant economies of scale. For instance, public water services typically represent a natural monopoly, where duplicating infrastructure would be wasteful and impractical. On the other hand, a government monopoly may be created when the government grants exclusive rights to a single firm, such as by issuing a patent for a new invention, leading to a monopoly in that industry.
Barriers to entry like high start-up costs, control of essential resources, or legal restrictions such as patents and trademarks, can lead to monopolies. Predatory pricing could also be a tactic used by firms to create a monopoly, where prices are temporarily lowered to drive out competitors. Over time, intellectual property laws concerning patents and trademarks fuel innovation by granting temporary monopolies to creators and inventors.
Lastly, an oligopoly occurs when a few firms control a significant share of the market. This situation is distinct from a monopoly in that it involves several firms and is characterized by mutual interdependence, leading to strategic decision-making between competing firms. The auto industry and commercial air travel are examples of oligopolistic markets.