Patents reward firms for investing millions of dollars in research and development of new products. Some of the most obvious legal barriers are patents, copyrights, and licenses. Barriers to entry include the following five barriers. There are a variety of different barriers that may allow a firm to exercise market power (which really just means that a firm can set price above marginal cost and extract positive profits). But if there is a barrier, entry by profit-seeking firms does not happen and economic profits can persist. Recall from our discussion of perfect competition that when firms are able to obtain economic profits, other firms/entrepreneurs are attracted to the industry and entry will occur until economic profits are reduced to zero. Does a monopoly have an incentive to advertise? Since the firm is also the market demand curve, it has one hundred percent of the market share however, monopolies may advertise to increase overall market demand or to improve goodwill or public relations. Thus if it wants to sell more, it must lower the price. The demand curve the firm faces is the market demand curve. We will save our discussion on monopsonies until near the end of the course.Ī monopoly determines not only the quantity to produce but also the price it will charge. Studying the attributes and behavior of a monopoly is a useful reference point particularly when looking at the other market structures.Īs an interesting side note, when there is only one seller in a market, it is called a monopoly, but when there is only one buyer in the market, it is called a monopsony. It will also become clear that firms have an incentive to try to gain a monopoly. We will expand on these sources of monopoly power later. For example, patents expire, new resources are often discovered, and new technologies allow new competitors into the market. Historically, pure monopolies are rare and often short lived because the reason for their existence (usually blocked entry) is somehow weakened. Entry into the market is blocked, which gives the firm market power (i.e., the power to raise price above marginal cost). A monopoly consists of one firm that produces a unique product or service with no close substitutes. Monopolies are on the other end of the continuum from pure competition.
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