This lesson introduces barriers to entry and explains how economies of scale can make a market a natural monopoly. These ideas help explain why high profits do not always attract new competitors.
In a competitive market, unusually high profits can attract new firms. As firms enter, greater competition can push prices down and reduce profits. A barrier to entry is a legal, technological, or market force that discourages or prevents potential competitors from entering a market.
All flashcards
What defines a natural monopoly?
Economies of scale let one producer serve the market at lower average cost than multiple producers.
How can control of a scarce resource create market power?
If competitors cannot obtain an essential input, they may be unable to produce enough to compete effectively.
What is a legal monopoly?
A market in which laws or regulations prohibit or limit competition.
What does intellectual property protect?
Rights over inventions, creative works, identifying marks, or confidential business information.
What is predatory pricing?
A sharp price cut intended to make it unprofitable for a competitor to remain in the market.
Quiz questions
What can happen when a firm controls a scarce input that other producers need?Answer: Rivals may be unable to obtain enough of the input to compete effectively.
Which situation is an example of a legal monopoly?Answer: A law reserves first-class mail delivery in the United States to one provider.
Why might a government regulate a single utility provider?Answer: To promote access and appropriate service when customers have few alternatives.
How did newer transmission technologies affect the case for a single telephone provider?Answer: They made it more practical for multiple companies to provide service using different or shared systems.
How can predatory pricing deter a new competitor?Answer: An established firm cuts prices sharply, potentially making it unprofitable for the entrant to remain.
Based on Principles of Economics 3e by Steven A. Greenlaw, David Shapiro, Daniel MacDonald (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.