Economies of scale act as one common type of barrier to entry, but there are others, including legal restrictions, high cost of entry, advertising, and product differentiation. 21.5. LEGAL RESTRICTIONS Governments sometimes restrict competition in certain industries. Important legal restrictions include patents, entry restrictions, and foreign-trade tariffs and quotas. A patent is granted to an inventor to allow temporary exclusive use of the product or process that is patented. For example, pharmaceutical companies are often granted valuable patents on new drags in which they have invested hundreds of millions of research and development dollars. Patents are one of the few forms of government-granted monopolies that are generally approved of by economists. Government grant patent monopoly patent protection, a company or a sole inventor might be unwilling to devote time and resource to devote time and resources to research and development. The temporarily high monopoly price and the resulting inefficiency is the price society pays for the invention. Government also impose entry restrictions on many industries. Typically, utilities, such as telephone, electricity distribution, and water, are given franchise monopolies to serve an area. In these cases, the firm gets an exclusive right to provide a service, and in return the firm agrees to limit its profits and provide universal service in its region even when some customers might be unprofitable. Historians who study the traffic have written, “The tariff is the mother of trusts.” This is because government-imposed imposed import restrictions have the effect of keeping out foreign competitors. It Economic Analysis 94
could be very well be that a single country’s market for a product is only big enough to support two or three firms in an industry, while the world market is big enough to support a large no of firms. Then a protectionist policy might change the industry structure. When markets are broadened by abolishing tariffs in a large free-trade area, vigorous and effective competition is encouraged and monopolies tend to lose their power. One of the most dramatic example of increased competition has come in the European Union , which has lowered tariff among member countries steadily over the last three decades and has benefited from larger markets for firms and lower concentration of industry. 21.6. HIGH COST OF ENTRY In addition to legally imposed barriers to entry , there are economic barriers as well. In some industries the price of entry simply may be very high. Take the commercial-aircraft industry, for example. The high cost of designing testing new airplanes serves to discourage potential entrants into the market. It is likely that only two companies – Boeing and Airbus – can afford the $10 to $15 billion that the next generation of aircraft will cost to develop.
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- Fall '19