Economic policy, monopoly and its impact on society

let's first define what is monopoly?
A monopoly is a firm that has sole control over a market. A monopoly is a price setter, i.e. it can earn a large profit by preventing the market from achieving an equilibrium price. To maximize its profits monopoly produces less than the efficient quantity and raises the price. This also means that monopolies expect natural monopolies, prevent the efficient use of resources. Hence, monopoles have crucial impact on economic development and on the entire society. They seriously impact the redistribution of resources resulting in distribution inefficiency. In general, it could be stated that the more monopolized the national market is the less the distribution efficiency is. Although this mainly deals with normative economics, I believe that few can disagree with the idea that monopolies by redistributing wealth from the poor to the rich cause serious social and economic injustice and instability.
The major factors for a monopoly to rise are:
1. No close substitutes
2. Barriers to entry.
Monopolies are constantly under the attack from new product and ideas that substitute for product monopolies produce. For example satellite network has weakened the monopoly of cable television; similarly fax machine and email have weakened the postal service.
Legal and natural constraints that protect firm from potential competitors are called barriers to entry. A firm sometimes can create its own barrier to entry by acquiring a significant portion of key resource. For instance, De Beers controls more than 80% of the world’s supply of diamonds. A legal monopoly is a market in which competition and entry are restricted by gaining a public franchise, government franchise, patent or copyright. On the other hand, natural barriers create a natural monopoly. This is an industry where one firm can supply the entire market at the least price. Such an example can serve the production and distribution of electric power.
To illustrate a typical entry restriction case let me bring the example of eBay. eBay is the dominant player in internet auction business. Because most buyers use eBay, so do most sellers. The opposite is also true –because the majority of sellers use eBay, so do the buyers. The major beneficiary is eBay, which gains market power, since due to seller and buyers choice, it has dominant position. This phenomenon is called a network externality. Making it hard for any other firm to break into internet auction business, eBay can set the combination of quantity and price at such a level where profit is maximized==> {optimizing Q where profit is maximized [π = TR-TC; maxπ = (MR-MC)' ==> =0] }.

Cost of monopoly
Two major social economic costs that society pays for tolerating monopoly are dead weight loss (DWL) and rent seeking.
The DWL is calculated using the following equation:
DWL =
Where

This equation shows that the more is the more DWL is incurred. This is because with less elastic demand consumers become more indifferent to price changes, or saying it differently, consumers value this good more. This fact allows monopolist to price at a higher price. It’s easy to see the relationship between MR and .
Profit maximizing monopoly never produces an output in the inelastic portion of demand. If it did so, it could charge a higher price, produce a smaller quantity, and increase its profit.
Rent seeking is any attempt to capture consumer surplus, produces surplus or an economic profit. An attempting to capture the economic profit by monopoly is a cost to the society, since a monopoly makes its economic profit in expense of consumer surplus.
Advantages
The main reason why monopolies exist is that it has potential advantages over a competitive alternative. These advantages are:
1. Incentive to innovation
2. Economies of scale and economies of scope.
Innovation can take the form of developing a new product or a lower cost way of existing product. It is clear that some temporary market power arises from innovation. A firm that develops a new product and gets the patent for it becomes the exclusive supplier for it, and hence gains market power. In perfect competition this can happen only in short run. In long run competitive firms must cut costs. Hence, they cannot afford huge R&D expenses.
Economies of scale and economies of scope can lead to a natural monopoly. A firm can experience economies of scale if an increase in output brings a decrease in the average total cost. A firm can experience economies of scope when an increase of in the range of goods produced brings a decrease in ATC. This mainly happen when in a specific industry some goods produced share similar capital recourses.
There are some examples, though, where a combination of economies of scale and scope do not necessarily lead to monopoly. Public utilities such as gas, electric power and garbage collection once were natural monopolies. But technological advances separated the production of say, electric power from its distribution.