Sources of Monopoly Power:

Any of the following factors may explain the emergence of monopoly firm:

(i) Control of the entire supply of a basic input: If the entire supply of the basic raw materials required in the production of a commodity is controlled by single firm, such a firm will monopolize the supply of the product.

(ii) Economies of scale: A large firm may retain a monopoly power through cost advantages gained from the use of cost-saving technology which enables it to sell profitably at a lower price than could any small competitor.

(iii) Franchises and patents: If a firm invents a machine or production process after huge costs have been incurred on research and development (R and D) efforts, the government may grant the firm monopoly privilege in the form of exclusive license or patent i.e. legal protection that make it illegal for new firms to produce exactly the same type of machine. This is to encourage creativity in the economy.

(iv) State monopoly: The government may assume a monopoly power in the production of some commodities or in the provision of some services; either to prevent people from being exploited or to ensure adequate supply of essential facilities which cannot be provided by private entrepreneurs because of huge capital and high risk involved. This is the case for public utilities, such as electricity, water, railway transport service, etc.

(v) Merger and acquisition: Large firms may merge to control the entire market supply or a large firm may acquire (buy) smaller firms that can no longer operate profitably to gain total control of the market supply.

(vi) Locational factor: Due to the size of an area, there might not be incentive for investors to establish firms in the areas until one investor takes the risk and remains the sole firm in the community enjoying the monopoly power. This is the case for rural banking scheme in most developing economies.