Chapter 24 - 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, p. 510. If ATC is declining 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.
ALCOA, dominated the aluminum industry for
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
post office, utilities, cable TV, radio/TV stations, Dept of Motor Vehicles, etc.
Occupational licensing or business licensing - limits entry/competition.
hair stylists, taxicabs, accountants, etc.
ensures minimum standards.
costs, reduces competition, puts in place barriers to enter the profession. Who generally asks for
increased regulation - industry or consumers?
CPAs - new 150 credit hour requirement.
("When buying and selling are controlled by legislation, the first things to be bought and sold are
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.
development of new products, fosters innovation, creative discovery process. Without legal protection
for intellectual property, there would less innovation, fewer new products, etc.
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.
1) Aluminum before WWII. 2)
Diamonds are only found in a few places on the planet, mostly South Africa. One company dominates
the diamond market, De Beers.
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.