Discuss the major barriers to entry into an industry. Explain how each barrier can foster monopoly.

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Discuss the major barriers to entry into an industry. Explain how each barrier can foster monopoly.


Discuss the major barriers to entry into an industry. Explain how each barrier can foster monopoly. Which barriers, if any, do you feel give rise to monopoly that is socially justifiable?  LO12.2

Answer and explanationsSolution by a verified expert

Barriers to entry are the characteristic features of monopoly and oligopoly, which restrict other firms from entering the industry. The only difference is monopoly has a single firm, while an oligopoly consists of few large firms. When the barriers are strong, it leads to monopoly and there does not exist any competition, but when the barriers to entry are relatively weak, it leads to an oligopolistic market structure.

The barriers to entry arise mainly due to the following reasons:

Economies of scale: It is the characteristic of big firms, which results in declining the average cost due to their large market size. The bigger the size of the firm, the more would be its economies of scale. The average cost falls with an increase in the amount of output. If more firms wish to enter the market, they would not be able to attain economies of scale and that would increase the cost of production. Ultimately, the burden would be on the consumers. Consequently, economies of scale act as a barrier to entry.
Patents and Licenses: Patents give exclusive rights to the inventor to protect his invention and at times give monopoly power to the patent holder. This is often observed in the case of R&D firms. The government may also limit the entry of firms into an industry by granting licenses to few. For instance, a trade license prevents the entry of new traders in a particular business, which increases the profit of the existing traders.
Exclusive ownership of raw materials: If any firm is the sole supplier of any raw material, then it can gain monopoly power.
Unfair competition: Some big producers often practice unfair competition through pricing strategies in order to force rivals to exit the market.
However, natural monopolies such as local suppliers of E or W in towns are socially justifiable, since these firms have higher setup costs and with their large scale of production, the average costs decline. This would allow the consumers to enjoy the benefits of declining costs if regulated properly. Any other firm entering the industry would only lead to a drain of resources and increase the burden on consumers. Consequently, at the time to protect the interest of consumers, the government grants exclusive franchise to any single company and regulate the monopoly power.

Verified Answer
Economies of scale, patents and licenses, not fair competition, and exclusive ownership of raw materials are barriers to entry, which leads any market structure to be a monopoly or oligopoly. Each of these barriers to entry promotes monopoly or oligopoly by creating a cost disadvantage for the new entrants in the market.

The advantage of reduced costs due to economies of scale is often enjoyed by the consumers in the form of reduced prices when regulated properly. Consequently, such barriers may be thought of as socially justifiable as they also serve the interest of the consumers to a large extent.

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