Describe the types of entry barriers that can exist and their importance to the study of monopoly.

Question

What will be an ideal response?

Answer 1

There are seven types of barriers discussed in the text.1. Legal restrictions on entry. The example given in the text is the Postal Service, which has a monopoly on letter delivery. Other examples include local franchises for various goods or services, or exclusive licenses for local utilities, e.g., cable TV.2. Patents, which are a type of legal impediment granted by government to inventors of new products or processes. Given as a reward to invention, a patent can give protection from competition for the life of the patent. Many large firms had an origin in patent position, such as Xerox, Polaroid, and Pfizer.3. Control of a scarce resource or input, such as raw materials. Few examples exist at present but the South African diamond syndicate was a good example in the past.4. Deliberately erected entry barriers can be created by firms to deter entry by others. One method is to sue competitors to scare them away; another is heavy spending on advertising to secure high customer loyalty.5. Large sunk costs, which discourage entry because a great deal must be put into the effort to enter, with no alternative economic value to the resources. The risk of failure increases when sunk costs increase.6. Technical superiority may create a monopoly, because rivals are unable to keep up with the leader. Examples of this are IBM in computers during the 1970s and 1980s and Microsoft in the software business at present.7. Economies of scale give large firms a cost advantage over smaller firms. If one firm can become large, it is able to charge a lower price, still cover average cost, and become a monopoly.Entry barriers are critical to the study of monopoly, because a monopoly will not continue unless there is a barrier to prevent other firms from entering the industry. The lure of profits is strong, and only a barrier will keep other firms out of the industry.