Cost-Based Monopoly

Certain cost structures may facilitate the creation of a monopoly. One possibility is
that a firm may have substantially lower costs than potential rivals. A second possibility
is that the firms in an industry have cost functions such that one firm can
produce any given output at a lower cost than two or more firms can.
Cost Advantages. If a low-cost firm profitably sells at a price so low that other
potential competitors with higher costs would lose money, no other firms enter the
market. Thus, the low-cost firm is a monopoly. A firm can have a cost advantage over
potential rivals for several reasons. It may have a superior technology or a better way
of organizing production.16 For example, Henry Ford’s methods of organizing production
using assembly lines and standardization allowed him to produce cars at substantially
lower cost than rival firms until they copied his organizational techniques.
If a firm controls an essential facility or a scarce resource that is needed to produce
a particular output, no other firm can produce at all—at least not at a reasonable cost.
For example, a firm that owns the only gravel quarry in a region is the only firm that
can profitably sell gravel to local construction firms.