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

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.