Are there barriers to entry in a monopoly

Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. Barriers to entry is an economics and business term describing factors that can prevent or impede newcomers into a market or industry sector, and so limit competition.

These can include high start-up costs , regulatory hurdles, or other obstacles that prevent new competitors from easily entering a business sector. Barriers to entry benefit existing firms because they protect their market share and ability to generate revenues and profits.

Common barriers to entry include special tax benefits to existing firms, patent protections, strong brand identity, customer loyalty, and high customer switching costs. Other barriers include the need for new companies to obtain licenses or regulatory clearance before operation. Some barriers to entry exist because of government intervention, while others occur naturally within a free market. Often, companies lobby the government to erect new barriers to entry.

Ostensibly, this is done to protect the integrity of the industry and prevent new entrants from introducing inferior products into the market. Generally, firms favor barriers to entry in order to limit competition and claim a larger market share when they are already comfortably ensconced in an industry. Other barriers to entry occur naturally, often evolving over time as certain industry players establish dominance. Barriers to entry are often classified as primary or ancillary.

A primary barrier to entry presents as a barrier alone e. An ancillary barrier is not a barrier in and of itself. Rather, combined with other barriers, it weakens the potential firm's ability to enter the industry. In other words, it reinforces other barriers. Barriers to entry may be natural high startup costs to drill a new oil well , created by governments licensing fees or patents stand in the way , or by other firms monopolists can buy or compete away startups.

Industries heavily regulated by the government are usually the most difficult to penetrate. Examples include commercial airlines, defense contractors and cable companies. The government creates formidable barriers to entry for varying reasons.

In the case of commercial airlines, not only are regulations stout, but the government limits new entrants to limit air traffic and simplifying monitoring. Cable companies are heavily regulated and limited because their infrastructure requires extensive public land use.

Sometimes the government imposes barriers to entry not by necessity but because of lobbying pressure from existing firms. For example, a handful of states require government licensing to become a florist or an interior decorator. Critics assert that regulations on such industries are needless, accomplishing nothing but limiting competition and stifling entrepreneurship. Barriers to entry can also form naturally as the dynamics of an industry take shape.

Brand identity and customer loyalty serve as barriers to entry for potential entrants. Certain brands, such as Kleenex and Jell-O, have identities so strong that their brand names are synonymous with the types of products they manufacture. Industry sectors also have their own barriers to entry that stem from the nature of the business as well as the position of powerful incumbents.

Before any company can make and market even a generic pharmaceutical drug in the United States, it must be granted a special authorization by the FDA. As of , the median review time from receipt of application to approval was 37 months. Each application is incredibly political and even more expensive.

In the meantime, established pharmaceutical companies can replicate the product awaiting review and then file a special day market exclusivity patent, which essentially steals the product and creates a temporary monopoly.

Just as significantly, it can take up to 10 years for a drug to be approved for a prescription. The FDA usually approves about one in 10 clinically tested drugs. Consumer electronics with mass popularity are more susceptible to economies of scale and scope as barriers.

Economies of scale mean that an established company can easily produce and distribute a few more units of existing products cheaply because overhead costs, such as management and real estate, are spread over a large number of units. Government limitations on competition used to be more common in the United States. From the s to the s, one set of federal regulations limited which destinations airlines could choose to fly to and what fares they could charge.

Another set of regulations limited the interest rates that banks could pay to depositors; yet another specified how much trucking firms could charge customers. What products we consider utilities depends, in part, on the available technology. Fifty years ago, telephone companies provided local and long distance service over wires. It did not make much sense to have many companies building multiple wiring systems across towns and the entire country.

The same thing happened to local service, especially in recent years, with the growth in cellular phone systems. The combination of improvements in production technologies and a general sense that the markets could provide services adequately led to a wave of deregulation , starting in the late s and continuing into the s. This wave eliminated or reduced government restrictions on the firms that could enter, the prices that they could charge, and the quantities that many industries could produce, including telecommunications, airlines, trucking, banking, and electricity.

Around the world, from Europe to Latin America to Africa and Asia, many governments continue to control and limit competition in what those governments perceive to be key industries, including airlines, banks, steel companies, oil companies, and telephone companies. Vist this website for examples of some pretty bizarre patents. Businesses have developed a number of schemes for creating barriers to entry by deterring potential competitors from entering the market.

One method is known as predatory pricing , in which a firm uses the threat of sharp price cuts to discourage competition. Predatory pricing is a violation of U. Consider a large airline that provides most of the flights between two particular cities.

A new, small start-up airline decides to offer service between these two cities. The large airline immediately slashes prices on this route to the bone, so that the new entrant cannot make any money. After the new entrant has gone out of business, the incumbent firm can raise prices again. After the company repeats this pattern once or twice, potential new entrants may decide that it is not wise to try to compete.

Small airlines often accuse larger airlines of predatory pricing: in the early s, for example, ValuJet accused Delta of predatory pricing, Frontier accused United, and Reno Air accused Northwest. In , the Justice Department ruled against American Express and Mastercard for imposing restrictions on retailers that encouraged customers to use lower swipe fees on credit transactions. In some cases, large advertising budgets can also act as a way of discouraging the competition. If the only way to launch a successful new national cola drink is to spend more than the promotional budgets of Coca-Cola and Pepsi Cola, not too many companies will try.

A firmly established brand name can be difficult to dislodge. Figure lists the barriers to entry that we have discussed. This list is not exhaustive, since firms have proved to be highly creative in inventing business practices that discourage competition.

When barriers to entry exist, perfect competition is no longer a reasonable description of how an industry works. When barriers to entry are high enough, monopoly can result. Barriers to entry prevent or discourage competitors from entering the market. These barriers include: economies of scale that lead to natural monopoly; control of a physical resource; legal restrictions on competition; patent, trademark and copyright protection; and practices to intimidate the competition like predatory pricing.

Intellectual property refers to legally guaranteed ownership of an idea, rather than a physical item. The laws that protect intellectual property include patents, copyrights, trademarks, and trade secrets. A natural monopoly arises when economies of scale persist over a large enough range of output that if one firm supplies the entire market, no other firm can enter without facing a cost disadvantage.

Classify the following as a government-enforced barrier to entry, a barrier to entry that is not government-enforced, or a situation that does not involve a barrier to entry. Suppose the local electrical utility, a legal monopoly based on economies of scale, was split into four firms of equal size, with the idea that eliminating the monopoly would promote competitive pricing of electricity.

What do you anticipate would happen to prices? Because of economies of scale, each firm would produce at a higher average cost than before. They would each have to build their own power lines. As a result, they would each have to raise prices to cover their higher costs. The policy would fail. If Congress reduced the period of patent protection from 20 years to 10 years, what would likely happen to the amount of private research and development?

Shorter patent protection would make innovation less lucrative, so the amount of research and development would likely decline. ALCOA does not have the monopoly power it once had. How do you suppose their barriers to entry were weakened?

For many years, the Justice Department has tried to break up large firms like IBM, Microsoft, and most recently Google, on the grounds that their large market share made them essentially monopolies. In a global market, where U. Intellectual property laws are intended to promote innovation, but some economists, such as Milton Friedman, have argued that such laws are not desirable.

In the United States, there is no intellectual property protection for food recipes or for fashion designs.

Considering the state of these two industries, and bearing in mind the discussion of the inefficiency of monopolies, can you think of any reasons why intellectual property laws might hinder innovation in some cases? Return to Figure. Suppose a new firm with the same LRAC curve as the incumbent tries to break into the market by selling 4, units of output.

Sunk costs are those that cannot be recovered when a firm leaves a market, and include marketing and advertising costs and other fixed costs. In order to compete, new entrants will have to match, or exceed, this level of spending in order to compete in the future. This deters entry and is widely found in oligopolistic markets such as pharmaceuticals and the chemical industry.

Limit pricing means the incumbent firm sets a low price, and a high output, so than entrants cannot make a profit at that price. This is best achieved by selling at a price just below the average total costs ATC of potential entrants.

This signals to potential entrants that profits are impossible to make. The incumbent is exploiting its superior knowledge of the market, and production costs, for its own advantage. This involves taking over a potential rival by purchasing sufficient shares to gain a controlling interest, or by a complete buy-out.

As with other deliberate barriers, regulators, like the Competition Commission, may prevent this as it would reduce competition.

Switching costs are those costs incurred by a consumer when trying to switch suppliers. They can involve costs of purchasing or installing new equipment, loss of service during the switching process, and the effort involved in searching for a new supplier or learning a new system.

These are common when switching energy suppliers, banks, TV and telephone suppliers. While these may also be structural in nature it is common to refer to them as strategic barriers as they are understood and exploited by suppliers. Research by the Commission on Banking found that, in the UK people only change bank accounts once every 26 years — it was against this that in September UK banks were forced to make switching accounts much easier. Advertising is another sunk cost — the more that is spent by incumbent firms the greater the deterrent to new entrants.

Contracts, patents and licenses make entry difficult as they protect existing firms who have won the contract, or who own the license or hold the patent.