Monopoly and Fair Return

Topics: Monopoly, Microeconomics, Economics Pages: 3 (935 words) Published: November 13, 2012
Chapter 10 (Tentative Due Date: by November 1)

Question 2: Discuss the major barriers to entry into an industry. Explain how each barrier can foster either monopoly or oligopoly. Which barriers, if any, do you feel give rise to monopoly that is socially justifiable? LO1 The major barriers to entry in an industry are economies of scale, legal barriers such as patents & licenses and other strategic or pricing barriers. Economies of scale occur only in large firms who are able to reach a minimum efficiency scale point and operate at that point for a long period. This high TC results in a low ATC and high efficiency. Once a huge firm innovates, it protects that very idea or product through patents disallowing other firms to copy their product. Government licensing could also result in limited entry of firms because they might not provide permission for another firm to enter the market. Another means to reduce competition within an industry is to manipulate price. Monopolists, being a price setter, could slash their price just to make it tougher for their competitor to survive. Other strategic methods could include increased advertisement to a level where the lesser and smaller firms will find impossible to compete against. These barriers of entry can prove to be pertinent for the existence of a pure monopoly. The absence of some of these barriers would lead away to a market structure resembling an oligopoly or perhaps even a monopolistic competitive industry if the number of firms was to be large. And in the case where there are no barriers a purely competitive market would appear. But definitely some barriers are within legal rights. For example a patent protects the product for a number of years and it’s understandable that a monopoly would want to restrict the usage of their research and hard work. Similarly if the price slashes are pushing out competition, they are at the same team encouraging competitors to reduce their costs/price which is great for...
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