Discuss the types of barriers to entry (legal restrictions, economies of scale, and control of an essential resource) and explain whether each type is likely to provide long-term monopoly power.
Different circumstances can make barriers to entry either harder or easier to overcome. In other words, each type of barrier to entry may or may not provide long-term monopoly power. Let us examine why this is so.
One type of barrier is legal restrictions. Some legal restrictions are harder to overcome than others. Some legal restrictions can be fairly easy to overcome. One example of this is patents. Patents are often easy to overcome because people can create similar products on their own that will compete with the patented product. For example, Apple was not able to use patents on smart phone technology to keep other companies from competing with them. Other legal restrictions are harder to overcome. For example, most local governments award monopolies to a single cable TV company. In order to overcome this barrier, a firm would have to persuade the government to open the market. This would be harder to do. In these ways, some legal restrictions are likely to lead to long-term monopoly power while others are not.
A second type of barrier is economies of scale. Economies of scale are the hardest barrier to overcome. This is true because economies of scale typically do not disappear. For example, it will always be easier for large companies to make passenger airliners. This will not stop being true. Therefore, it will be very hard for any small company to break into the business of building airliners and we can expect that economies of scale will be more likely to provide long-term monopoly power.
The third type of barrier mentioned is control of an essential resource. This may or may not provide long-term monopoly power. If one firm owns all of the oil in a given area, for example, it can be very hard for other companies to enter the oil business. They would have to find more oil that the original company does not own. This would be expensive and even impossible. However, control of essential resources will not always provide a long-term monopoly because firms can invent new ways to get around the need for a given resources. For example, the development of fracking technology would allow firms to extract oil when it would not have been possible to do so before. As another example, phone companies’ control over telephone wires was eventually circumvented when cell phone technology was invented.
In these ways, different types of barriers to entry can be more or less likely to provide long-term monopoly power.