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Barriers To Entry In Monopoly
Some important factors that serve as barriers to entry of a new firm in monopoly and therefore constitute a source of monopoly power are:-
a. patent or copyright.
When a firm produces a new product, they get patent rights or copyrights from the government for their product and the production process so that other firms cannot produce the same product. These patent rights are granted for a certain period of time and constitute strong barriers to the entry of potential competitors.
E.g. when copying machine was invented, its inventor ‘Xerox’ company had monopoly in its production based on the patent granted to it by the government. Likewise when a new medicine is invented by a medical company, it gets patent right from the government over its production,
b. control over essential raw materials.
Another source of monopoly power is a control by a particular firm over an essential raw material or input used in the production of commodity.
E.g. before World War II, Aluminum company of America exercised control over almost every source of bauxite, which is an essential input for manufacture of aluminum.
c. grant of franchise by the government.
A firm is granted exclusive legal rights by the government to produce a given product or service in a particular region. In this case however the government keeps with itself the right to regulate the price and quality of the product.
E.g. the US government has given a monopoly to Network Solutions, Inc which maintains the database of all the .com, .net, .org Internet addresses.
d. economies of scale : natural monopoly.
When significant economies of scale are present over a wide range of initial output, average cost of production goes on falling over a wide range of output and reaches its minimum at an output that is large enough for a single firm to meet the entire market demand at a profitable price. In such a situation if more than one firm operates each firm must be producing at a price higher than the minimum average cost. In such a situation each firm is inclined to cut prices to increase its output and reduce the average cost of production. This leads to price warfare and one who survives this economic warfare is the monopolist. Such monopolies with significant economies of scale are called natural monopolies. These are often regulated by the government so that they might not charge very high prices.
E.g. Distribution of water. To provide water to a town a firm must build a network of pipes through the town. If two or more firms were to compete for this, each would have to pay the fixed cost of building a network which would raise the average cost.
e. advertising and brand loyalties established by the firm.
Another important reason that prevents the entry of new competitors in the monopoly industry is strong loyalties to the brands of the established firms and their heavy advertising campaigns or customer service programs to promote their brand. Even if the monopolistic firms expect new potential competitor they indulge in price cutting so that the entrant finds the industry unprofitable.
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