If a monopoly firm is making long – run profits there is every incentive for some new firms to enter and if such an entry occurs, the monopoly ceases to exist. Therefore, if the monopoly has to maintain its position and protect its profits, there must be some effective barriers to prevent entry of new firms into industry.
One such barrier may exist as a result of economies of scale that a big monopoly firm may be enjoying while such a benefit may not be available to small firms that may aspire to enter into industry. This is because these economies and cost reductions come at a very big scale of operations that requires such huge investment which may be beyond the capacity or means of the new firms.
Another barrier may exist due to technological and demand factors which allow no more than one firm to operate and cover its while operating at minimum point of its long – run average cost curve. In such a case competition is just not feasible because at no price two firms can sell and cover their costs. Such a case where only one firm can survive and competition is just not viable, is called natural monopoly.
Yet another type of technologically determined barrier may exist in terms of ‘set – up cost’. A new firm that intends to enter into industry must be ‘fully grown’ to be able to compete effectively with the existing monopoly firm. But the cost of this being ‘fully grown’ involves development of competitive products, establishment of a complex dealer network, building a strong brand image, etc. which the existing monopoly has done over a long time period. The resources cost of doing all such things may indeed itself be so high and time prohibitive to make the entry unviable.
There are also barriers created by the government policies and actions such as patent laws that confer sole legal right to produce a commodity on the patent holder for a specific period. The entry of other firms in production of this commodity thus becomes a breach of patent law that may call for legal action for the new entrants. Copyright for books, articles, work of arts and other creative activities is also a similar type of legal barrier.
Government regulations like license, permits, quotas, etc. also act as barriers as these severely restrict the entry of new players into industry. All such entry barriers frustrate that adjustment mechanism that could push profits towards competition level in the long-run.
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