Barriers to entryThis is a featured page

In a pure monopoly are the strong barriers to entry effectively block all potential competition.

Economies of Scale:
  • Modern technology in some industries cause extensive economies of scale.
    • Only single large firm can achieve low ATC.
    • When ATC ↓, only single producer (monopolist) can produce any particular output at min. TC
    • Single firm produces x units at lower cost than could more than 2 firms with combined output of x units -- benefits society in this case as cost (therefore, price is minimal).
  • How do economies of scale act as an entry barrier and protect monopolist from competition?
    • Small-scale producers cannot achieve low ATC. Therefore they can't achieve normal profit which results in consistent lost, which keeps the producers from surviving.
      • e.g. The plane industry requires expensive machines, so new companies would have to sell their planes at a very high price to make up for their costs, while companies like Boeing have the ability to sell their planes for lower prices.
    • Financial obstacles + “starting big” risks – prohibitive.
  • Natural monopoly – when market demand cuts long-run ATC curve when ATC is still declining.
    • Society better off with single monopoly producing at lower costs.
    • Doesn't guarantee consumer benefits since monopolist can choose not to minimize prices to maximize profit.
    • Therefore government will set a price celling.
    • Company will not produce at the socially optimal level.
Barriers to entry - Welker's Wikinomics Page

Legal Barriers to Entry:
  • Patent: exclusive right of an inventor to use, or to allow another to use, her or his invention.
    • protect the inventor from rivals who would use the invention w/o having shared in effort and expense in developing it.
    • provides the inventor with a monopoly position for the life of patent.
    • profit from one patent can finance the research required to develop new patentable products.
      • eg. In the pharmaceutical industry, patents of prescription drugs have produced large monopoly profts that help finance the discovery of new patentable medicine (therefore, monopoly power achieved through patents can be self-sustaining).
  • Licensing : Government using its authority to limit entry into industry.
    • Limited number of licenses given to radio/television stations, taxicab drivers, etc.; in this way, the market is controled so that new firms beyond a certain number cannot enter the industry to drive down prices and profits.
    • Sometimes the government also "licenses" itself to provide some product and thereby create a public monopoly.
      • eg. lotteries, state-owned liquor retail outlets.

Ownership or Control of Essential Resources:
  • A monopolist can use private property as an obstacle to potential rivals.
    • eg. a firm that owns or controls a resource essential to the production process can prohibit the entry of rival firms.
  • For example, the International Nickel Company of Canda (now known as Inco) used to control 90 percent fo the world's known nickel reserves. A new firm trying to enter the nickel market at that time would have an extremely hard time since the monopoly had all the resources.

Pricing and Other Strategic Barriers to Entry:
  • The monopolist may "create an entry barrier" by:
    • slashing prices to drive consumers towards their firm and away from other firms (Although this results in short term losses, in the long run, the monopoplist can maintain market power and aim for economic profits again).
    • stepping up advertising.
    • taking other strategic actions to make it difficult for entrants to succeed.

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