Title: 9.1 How Monopolies Form: Barriers to Entry – Principles of Economics
Headings: 9.1 How Monopolies Form: Barriers to Entry
9.1 How Monopolies Form: Barriers to Entry
Learning Objectives
Natural Monopoly
Control of a Physical Resource
Legal Monopoly
Promoting Innovation
Intimidating Potential Competition
Summing Up Barriers to Entry
Key Concepts and Summary
Self-Check Questions
Critical Thinking Questions
Problems
Glossary
Solutions
Answers to Self-Check Questions

Content: Explain how economies of scale and the control of natural resources led to the necessary formation of legal monopolies
Analyze the importance of trademarks and patents in promoting innovation
Identify examples of predatory pricing
Because of the lack of competition, monopolies tend to earn significant economic profits. These profits should attract vigorous competition as described in Perfect Competition, and yet, because of one particular characteristic of monopoly, they do not. Barriers to entry are the legal, technological, or market forces that discourage or prevent potential competitors from entering a market. Barriers to entry can range from the simple and easily surmountable, such as the cost of renting retail space, to the extremely restrictive. For example, there are a finite number of radio frequencies available for broadcasting. Once the rights to all of them have been purchased, no new competitors can enter the market. In some cases, barriers to entry may lead to monopoly. In other cases, they may limit competition to a few firms. Barriers may block entry even if the firm or firms currently in the market are earning profits. Thus, in markets with significant barriers to entry, it is not true that abnormally high profits will attract new firms, and that this entry of new firms will eventually cause the price to decline so that surviving firms earn only a normal level of profit in the long run.