Diamonds are forever, and one will last forever. Classic advertising slogans highlight the nobility and elegance of diamonds. Diamonds have always been a symbol of luxury. When asked why, most people will answer: Because there are few diamonds, things are more valuable when they are rare, and rarity means they are valuable. But is this really the case? If you ask a geologist, he will tell you that diamonds are not that rare. In fact, diamonds are more common than other colored stones with gem qualities, according to the Dow Jones Irving Guide to Fine Treasures and Jewelry. They are simply perceived as rarer. Why do we think diamonds are rarer than other gemstones? Part of this is due to the brilliant marketing campaigns of diamond manufacturers, which constantly feed you the message that diamonds are rare, so that without even realizing it, you think diamonds are rare. In fact, the main reason why you think diamonds are rare is the diamond mining company De Beers: This company controls most of the diamond mines in the world and limits the number of diamonds provided to the market within a certain period of time, resulting in its monopoly on the world. World diamond production. South Africa's De Beers monopoly was founded in the 1880s by British businessman Cecil Rhodes. At that time, the world's diamonds were mainly supplied by mines in South Africa, however, there were many competing mining companies. In the 1880s, Rhodes bought most of these mines and consolidated them into a single company, De Beers. By 1989, De Beers controlled nearly all diamond production in the world. A monopolist is the sole (or nearly sole) producer of a good for which there are no close substitutes. When a company is a monopoly, its industry is a monopoly. For example, De Beers is a monopoly. Perfect competition and monopoly are both special types of market structures. They are two special categories within a market system. Perfect competitors sell their products at a given price; monopolies behave differently. Monopolists know that their actions affect market prices and take this effect into account when deciding output. The monopolist obtains high profits by reducing supply so that the price is higher than the price under perfect competition. Cecil Rhodes merged the diamond producers into De Beers because he recognized that the whole was worth more than the sum of its parts and that the profits generated by a monopoly would be greater than the sum of the profits of individual competing companies. The ability of a monopolist to raise prices above the competitive level by reducing output is called market power, and market power is related to monopoly. Any farmer who produces wheat does not have market power. He (or she) must use the current Wheat is sold at the market price. But your cable company has the market power to raise prices while still retaining many (though not all) of its customers because you have no other choice and the local cable company is the only one. In other words, it is also a monopoly. A monopolist can continue to maintain its monopoly position because other companies cannot enter its industry. There is something that prevents other companies from entering. This thing is called an entry barrier. In a market economy, there are four main barriers to entry: control of scarce resources or input factors, economies of scale, technological advantages, and government-created barriers. Let’s explain it in detail below: 1. Control of Scarce Resources or Inputs Once a monopolist controls critical resources or inputs in an industry, it can prevent other firms from entering the market. Cecil Rhodes created De Beers' monopoly on the diamond production industry by controlling most of the world's diamond-producing mines. 2. Economies of Scale In fact, in the early 19th century, when the natural gas supply industry was just emerging, there was competition within the industry, but this competition did not last long. Before long, nearly every city's natural gas supply was monopolized because of the large fixed costs of laying pipes to cities. Because the cost of laying a natural gas pipeline is not determined by the amount of gas a company sells, companies with large sales volumes have a cost advantage: because they can spread fixed costs over a wider area, their average total costs are lower than smaller companies, creating economies of scale.
In an industry characterized by economies of scale, larger companies profit more while smaller companies are driven out of the industry. By the same token, an established firm has a cost advantage over any potential entrant - a potential barrier to entry. Therefore, the monopoly of local natural gas companies is caused and maintained by the economies of scale of their own industries. Such monopolies induced and maintained by economies of scale are called natural monopolies. The defining characteristic of a natural monopoly is the existence of economies of scale in an industry over a certain range of output. The condition is that a large amount of fixed costs must be invested in the industry, and the average total cost of a certain quantity of products produced by one large enterprise is lower than that of two or more small enterprises. Natural monopolies abound in local utilities such as water, natural gas, electricity, local telecommunications services, and cable television, to name a few. 3． Technological Advantage If a company consistently maintains a technological advantage over potential competitors in the industry, it is likely to become a monopoly. From the 1970s to the 1990s, Intel has always maintained an advantage in the design and production of CPUs and has always had a monopoly in CPU production. But technological advantage is generally a short-term rather than a long-term barrier to entry: over time, competitors will invest money to improve their technology and compete with the technology leader. In fact, in recent years, Intel has found that its technological advantages have been threatened by its competitor AMD, an American advanced microelectronic device company, and the monopoly pattern has gradually been broken. It is worth noting that in some high-tech industries, technological advantage is not a guarantee of victory over competitors. Some high-tech industries are characterized by network externalities, a situation in which the value of a product to consumers increases as the number of people using the product increases. In these industries, a business with the largest network and the largest number of consumers currently using its product has an advantage over its competitors in attracting new customers, an advantage that could allow it to become a monopoly. Microsoft is often seen as an example in this regard. The company's product, the Windows operating system, is technically inferior to Apple's operating system. However, because Windows consumers are much larger than Apple's, Microsoft has naturally become a monopoly on the operating system. 4. Barriers Created by the Government The most important barriers to legal monopoly created by the government are patents and copyrights. Patent rights are currently valid for 20 years and are given to inventors of new products; copyrights are given to authors and editors and are usually valid for the life of the creator plus 70 years. The government's starting point for creating legal monopolies is very simple, which is to ensure the profits of monopoly companies and achieve the purpose of encouraging innovation. A large part of the reason why a company is willing to invest a lot of money in the research and development of new products is that it expects to monopolize the industry and earn huge profits. Innovation is the source of social progress. In order to encourage innovation, the government sets up barriers to allow innovative companies to gain a monopoly position within a certain period of time and in a certain industry field, ensuring that companies can obtain high returns for their innovation, thereby stimulating companies. Continuously innovate and promote social progress. Economics highlight: Monopoly is a controversial topic. In order to obtain maximum profits, producers always want to be the largest in the industry and achieve monopoly in the industry, but consumers are well aware of the inconveniences caused by monopoly. On the one hand, monopoly concentration of resources improves efficiency; on the other hand, monopoly excludes competition and causes low efficiency. In short, monopoly is a balanced game process between producers and consumers.