Question

b. List and explain how a monopolist would use each of the barriers to entry and include how using that barrier would actually accomplish the monopolists’ objective. Be specific.

1.Economies of Scale:
2.The Natural Monopoly Case:
3.Patents:
4.License:
5.Ownership or Control of Essential Resources:
6.Pricing and Other Strategic Barriers to Entry/In anticipation of a potential competitor:

Please help me to explain these 6 answers for the question above. Thank you

Answer 1

1. Economies of scale - The monopolist has all the economies of scale i.e. he produces at the lowest cost. Hence makes it very profitable for himself. Monopolist's objective would be to deter the new entrant from entering the market. Hence, he would exploit all the possible economies of scale leaving nothing for the new entrant.

2. Natural Monopoly case - Natural monopolies are market structures that support only one firm to exist in the market. Here, the infrastructure or capital cost may be vey high and market regulations may be such that do not allow for more than one firm to exist. Here the monopolist would ensure that there is no way for the new entrant to even enter the market by raising these costs to an extent that he would not be able to pay.

3. Patents - Patents owned by existing firms for say any innovation can deter entry because the new entrant would have to potentially differentiate his products. He cannot use the monopolist's technology and product.

4. Licenses - Licenses act as barrier as it is tough, time consuming and costly to obtain the licenses and the monopolist already has them. Hence the new entrant may see the opportunity cost of obtaining them and be deterred from entering.

5. Ownership - There may be a case in which there is only one supplier of an essential resource and he supplies to the monopolist. The monopolist may have an agreement with him restricting him from supplying to others. Entering this market may be futile if the new entrant knows that he will not have access to these resources.

6. Pricing and other strategie - The monopolist may threaten to reduce his market price if the new entrant enters the market, by creating competition. Since price would lower, this would wipe out all the profits that are attracting the entrant making it futile for him to enter.