Economics » Monopoly » How Monopolies Form: Barriers to Entry

Key Concepts and Summary

Key Concepts and Summary

Barriers to entry prevent or discourage competitors from entering the market. These barriers include: economies of scale that lead to natural monopoly; control of a physical resource; legal restrictions on competition; patent, trademark and copyright protection; and practices to intimidate the competition like predatory pricing. Intellectual property refers to legally guaranteed ownership of an idea, rather than a physical item. The laws that protect intellectual property include patents, copyrights, trademarks, and trade secrets. A natural monopoly arises when economies of scale persist over a large enough range of output that if one firm supplies the entire market, no other firm can enter without facing a cost disadvantage.

Glossary

barriers to entry

the legal, technological, or market forces that may discourage or prevent potential competitors from entering a market

copyright

a form of legal protection to prevent copying, for commercial purposes, original works of authorship, including books and music

deregulation

removing government controls over setting prices and quantities in certain industries

intellectual property

the body of law including patents, trademarks, copyrights, and trade secret law that protect the right of inventors to produce and sell their inventions

legal monopoly

legal prohibitions against competition, such as regulated monopolies and intellectual property protection

monopoly

a situation in which one firm produces all of the output in a market

natural monopoly

economic conditions in the industry, for example, economies of scale or control of a critical resource, that limit effective competition

patent

a government rule that gives the inventor the exclusive legal right to make, use, or sell the invention for a limited time

predatory pricing

when an existing firm uses sharp but temporary price cuts to discourage new competition

trade secrets

methods of production kept secret by the producing firm

trademark

an identifying symbol or name for a particular good and can only be used by the firm that registered that trademark

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