Chapter 10 - PRICE-SEARCHER MARKETS WITH HIGH ENTRY BARRIERS
So far we have assumed that price-taker and price-searcher markets are competitive,
due to low barriers to entry (and exit). We now look at industries where the barriers to
entry/exit are high.
WHY ARE BARRIERS TO ENTRY SOMETIMES HIGH?
1. Economies of scale.
See opening quote. If ATC is decling over the entire range of
output that consumers are willing to buy, a single firm may dominate the industry.
The cost advantage may protect the firm from competition, including potential rivals.
The barrier to entry is the cost advantage that a single, very large firm may
ALCOA, dominated the aluminum industry for years.
2. Government Licensing.
Legal barriers are the oldest and most effective way to
get protection from competition, coercive monopoly. Using the power of the
government to eliminate, reduce competition.
post office, utilities, cable
TV, radio/TV stations, Dept of Motor Vehicles, etc.
Occupational licensing - limits entry/competition.
hair stylists, taxicabs, accountants, etc.
raises costs, reduces competition, puts in place barriers to
enter the profession.
3. Patents, other intellectual property rights.
Most countries have
copyright laws to grant legal protection to inventors, authors, songwriters, etc. Patents
give owners an exclusive legal right to be protected from competition for 17 years in
U.S. Advantages: stimulates research, development of new products, fosters
innovation, creative discovery process. Without legal protection for intellectual
property, there would less innovation, fewer new products, etc. Disadvantage: prices
are higher during the patent period, owner has a temporary monopoly.
4. Control over an Essential Resource.
Firm has exclusive control over a natural
resource, usually only temporarily, due to substitutes, discoveries,
diamonds are only found in a few places on the planet, mostly South
Africa. One company dominates the diamond market, Debeers.
THE CASE OF MONOPOLY
Monopoly literally means "single seller." In economic terms, a monopoly is a market
1) is a single seller of a good for which there are no good substitutes and
2) are high barriers to entry.
However, "no good substitutes" and "high barriers" are somewhat vague.
barriers to enter the auto industry might be considered high, because
you would need to operate at a huge scale to be competitive, and the large amount of
financial capital necessary might be a barrier to entry. However, capital markets are