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Chapter 10 - Chapter 10 PRICE-SEARCHER MARKETS WITH HIGH...

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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 have. Example: 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. Examples: post office, utilities, cable TV, radio/TV stations, Dept of Motor Vehicles, etc. Occupational licensing - limits entry/competition. Examples: Physicians, lawyers, hair stylists, taxicabs, accountants, etc. Advantage: ensures minimum standards. Disadvantage: raises costs, reduces competition, puts in place barriers to enter the profession. 3. Patents, other intellectual property rights. Examples?? 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, etc. Example: 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 where there: 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. For example, 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
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efficient, there are thousands of global investors, so if there was a profitable opportunity, capital could be raised to compete against GM. Also, there are substitutes for everything, so there are very few situations where no good substitutes exist.
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