ECN607 – Lectureaid_6.2

ECN607 – Lectureaid_6.2 - ECN607 Managerial...

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ECN607 – Managerial Economics Study Aid: lecture 6.2 Definition of a Monopoly A pure monopoly exists where a single firm is the only supplier of a good or service and where no substitutes exist. Barriers to Entry Barriers to entry serve to block competitors from entering an industry. Barriers to entry include the following: Exclusive ownership or control over a resource: At one point in time, DeBeers owned over 80% of the world's diamond mines. Because diamond mines are scarce, competitors were unable to have access to diamond mines to enter the retail diamond industry. Limited capital: Some industries such as the airline industry require large capital outlays for fleets of jets, hangar space, and terminal space such that these high entry costs effectively deter competition. Scale economies: Wal-Mart is able to purchase large quantities and realize cost discounts in order to pass these savings down to customers; economists call these economies of scales. Smaller retail stores do not have this advantage and are effectively blocked from entering and/or surviving against Wal-Mart. Government-imposed barriers include these: Licenses: Requiring a license such as a cosmetology license serves as a barrier to entry. Patents: For a period of 17 years, an inventor who has a patent on a product enjoys the protection of not having someone else copy or imitate the invention.
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