Barriers to entering monopolistic markets
High capital or other obstacles that prevent new competitors from easily entering an industry
Because of the lack of competition, monopolies generally tend to earn huge financial profits.
These incomes need to attract full-of-life competition as defined in best competition, but, due to one precise feature of monopolies, they do not. Barriers to access are the criminal, technological, or market forces that discourage or save your capacity competition from coming into a marketplace.
Barriers to access can vary from the simple and without difficulty surmountable, such as the price of renting retail space, to the extremely restrictive.
For instance, there is a finite quantity of radio frequencies available for broadcasting. Once the rights to them all have been purchased, no new competitors can input the market.
Reasons for Monopolies to Exist
1. Resource Control
Control over a natural resource that is critical to the manufacturing of a final right is one source of monopoly power.
Control over natural assets that are critical to the manufacturing of a good is one source of monopoly strength. Single possession over a useful resource gives the owner of the resource the electricity to raise the marketplace fee of a good over a marginal fee without dropping clients to competitors.
In different phrases, resource management permits the controller to charge a monetary lease. This is a traditional outcome of imperfectly aggressive markets.
A traditional example of a monopoly based totally on useful resource control is De Beers. De Beers Consolidated Mines was based in 1888 in South Africa as an amalgamation of some men’s and women’s diamond mining operations.
De Beers had a monopoly over the production of diamonds for most of the 20th century, and it used its dominant role to govern the international diamond marketplace. It satisfied independent manufacturers to join its unmarried-channel monopoly.
In times when manufacturers refused to enroll, De Beers flooded the marketplace with diamonds just like those they were producing. De Beers also bought and stockpiled diamonds produced by different producers so that you can manage charges through delivery.
The De Beers version was modified at the turn of the twenty-first century whilst diamond manufacturers from Russia, Canada, and Australia started out to distribute diamonds outdoors of the De Beers channel.
The sale of diamonds additionally suffered from growing consciousness approximately blood diamonds. De Beers’ marketplace percentage fell from as excessive as 90 percent in the 1980s to much less than 40 percent in 2012.
In practice, monopolies rarely arise because of control over natural resources. Economies are large, usually with multiple people owning resources. International trade is an additional source of competition for owners of natural resources.
Economies of Scale and Network Externalities
Economies of scale and network externalities discourage potential competitors from entering a marketplace.
Economies of scale and network externalities are two types of boundaries to entry. They discourage ability competitors from getting into a market and therefore make a contribution to the monopolistic power of some firms.
Economies of scale are value blessings that large companies obtain due to their length. They occur due to the fact the price consistent with units of output decreases with increasing scale, as fixed expenses are spread over extra units of output.
Economies of scale are also received through the majority shopping for materials with long-term contracts, the multiplied specialization of managers, the potential to obtain decreased interest fees when borrowing from banks, getting entry to a greater variety of economic gadgets, and spreading the value of advertising over a more variety of output.
Each of these factors contributes to discounts inside the lengthy-run common price of manufacturing.
A natural monopoly arises due to economies of scale. For herbal monopolies, the common total value declines usually as output increases, giving the monopolist an amazing value gain over capacity competitors. It will become maximum green for production to be concentrated in a single firm.
Natural Monopoly: A monopoly that is made because of cost structure is called a natural monopoly. It is made when the long-run average cost (LRAC) can be decreased and economies of scale are possible only when the output of the whole industry is produced by one firm. It means that the most efficient number of firms in an industry is one in the entire market. Hence, new firms cannot enter the industry. The following example and graph can explain natural monopoly.
Suppose that the market demand is 100,000 units for a particular product. If one firm produces 100,000 units, its LRAC will be $3. If two firms produce 50,000 units each, the average cost will be $10. The only way to have low LRAC is for the output of the whole industry should be produced by one firm. Hence, the optimal number of firms is 1. This firm will be a natural monopoly and it will naturally act as an entry barrier.
Government Barriers to Entry
Government barriers to entry are the hurdles that governments create to make it difficult for new firms to enter an industry. These barriers are imposed by governments to protect existing firms from new competitors, especially domestic firms from foreign competitors, to ensure safety and quality standards and to avoid duplication of resources through wasteful competition. Many other reasons are also possible.
These barriers can include.
Licensing and Permits
Some industries require specific licenses or permits to operate, which can be time-consuming and costly to obtain.
Regulatory Requirements
Compliance with government regulations, such as safety standards or environmental regulations, can pose challenges for new entrants.
High Taxes and Fees
Governments may impose high taxes or fees on certain industries, making it difficult for new businesses to compete.
Intellectual Property Protection
Intellectual property laws and patent regulations can create barriers for new entrants trying to bring innovative products or technologies to market.
Subsidies and Grants
Existing companies may benefit from government subsidies or grants, giving them a competitive advantage over new entrants.
Trade Barriers
Governments may impose trade restrictions or tariffs that limit competition from foreign companies.
Access to Government Contracts
Established companies may have an advantage in securing government contracts, limiting opportunities for new entrants.
Lobbying and Political Influence
Existing industry players may have strong political connections, making it challenging for new entrants to compete on a level playing field.
Other Barriers to Entry
High Capital Requirements
Some production processes require large investments in capital or large research and development costs that make it difficult for new companies to enter an industry.
Examples include steel production, pharmaceuticals, and space transport.
Network Effects
The use of a product by other people can increase its value to a person. One example is Microsoft spreadsheet and word processing software, which is still used widely.
This is because when a person uses software that is used by many others, he or she is less likely to run into compatibility problems in the course of work or other activities.
This tendency to use what everyone else is using makes it difficult for new companies to develop and sell competing software.
Government Backing
There are cases in which a government agency is the sole provider of a particular good or service and competition is prohibited by law.
For example, in many countries, the postal system is run by the government with competition forbidden by law in some or all services. Government monopolies in public utilities, telecommunications systems, and railroads have also historically been common.
In other instances, the government may be an invested partner in a monopoly rather than a sole owner. This will still make it difficult for competitors to operate on equal footing.
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