What barriers to entry exist in other industries that allow certain firms to operate as a monopoly?
Are these barriers contestable?
Industries such as cables and grids for electric supply, pipeline for gas, Water supply infrastructure, rail network are the example of natural monopoly. In all these industries there is a high initial cost that works as a barrier for new players in the market. This high initial cost is also called sunk cost.
Answer and Explanation:
Various factors lead to firm operate as a monopoly and eventually, these factors led to the entry barriers for other firms to enter the industry.
These factors could be :
- A high initial set up costs: High initial setup cost takes a lot of time to recover the full amount or to reach a break-even point. For example setting up to a telecom regulator, refinery. In order to recover the high costs, the firms produce goods which gradually leads to economies of scale, which become an entry barrier of the new firm, as to retain the monopoly power, the incumbent usually practices limit pricing or predatory pricing.
- Natural monopoly: This could be due to geographical location, of some kind of resources that one endows. For example, oil producing countries have a natural monopoly in oil production.
- Legal rights: Legal rights such as patents and copyrights which are exclusive given to a firm.
Having these barriers to entry make a market less competitive and less contestable.
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from Intro to Business: Help and ReviewChapter 3 / Lesson 13