Question

Relative to perfectly competitive markets, contrast a monopoly market structure. Explain the multiple ways that firms may enjoy barriers to entry from other firms, including natural monopolies (economies of scale), legal (patent, trademarks, copyrights, trade secrets, intellectual property), and predatory pricing.

Answer 1

A). A perfect competitive market and a monopoly market have different features and these features make one market apparently distinct from the other. The following are some key difference between these two market structures.

1. In a perfect competitive market, there are numerous sellers, but in a monopoly market there is only a single seller.

2. In a perfectly competitive market the market supply is made by large number of small sellers whereas in a monopoly the market supply is dominated by a single seller.

3. For the product in a perfectly competitive market, close and perfect substitutes are available, but in monopoly market there is no close substitutes are available.

4. There is free entry and exit of firms under perfect competition. But in monopoly there are barriers to the entry of new firms.

5. The competitive firms cannot practice price discrimination but monopoly practice price discrimination.

6. Perfect competitive firms charge a price equal to marginal cost, but a monopolist charge a price higher than marginal cost.

7. Since a competitive firm earns normal profit in longrun but a monopolist earn positive economic profit both in shortrun and longrun.

8. A competitive firm has a supply curve, its MC curve is its supply curve. But a monopolist has no supply curve.

9. The demand curve of a perfect competitor is horizontal and perfectly elastic. A monopolist faces a downward sloping demand curve which is less elastic.

10. A competitive firm is allocatively and productively efficient in longrun, but a monopolist is not.

11. A competitive market always maximizes social welfare but a monopolist minimizes the social welfare by creating deadweight loss.

B) A monopoly market creates barriers to the entry of other firms in several ways. Economies of scale are one of the methods that a natural monopolist can prevent the entry of other firms into the market. Economies of scale are the cost advantages that arise from the large scale production. When the monopoly firm produces on a large scale, it enjoys both internal economies and external economies of scale. When the monopolist produce on a large scale it can reduce the per unit fixed cost. It arises from the indivisibility of fixed factors. When the firm purchase raw materials in bulk quantities it can get the same at lower price. The efficient management in the firms enables the efficient co-ordination of labour and other inputs which reduce the cost per unit. The firm mostly used efficient advanced technology which increase the productivity of labour and plants and reduce the unit cost. When the firm sell output and buy materials in large quantities it gets transportation and insurance services at lower cost.

The monopolist gets legal right to use certain invention (patent) from the government which poses barriers to the entry of other firms. It also gets government sanction to use a particular logo or name (trade mark) for the product. The monopolist prevent other firms from copying or using for commercial purpose any item that monopolist use. The monopolist has certain trade secrets which help the monopolist to earn profit and these secrets are not disclosed to other firms. The monopolist gets exclusive right to commercialize any invention (intellectual property right). The monopolist use predatory pricing to discourage the entry of new firms into the market. Predatory pricing is a temporary price cut which cause loss to the rival firms and thus throw out the rivals from the market. By using all these methods the monopolist creates huge hurdles to the entry of new firms into the market.