Lesson: How Monopolies Form: Barriers to Entry

How Monopolies Form: Barriers to Entry

How Monopolies Form: Barriers to Entry

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  • In economics, a monopoly is a single seller (single-firm industry). A business that is a monopoly can be large or small. A monopolistic company is the only company that makes the product or provides the service.
  • A company within a monopoly has no competition.
  • Monopolies make it hard for other companies to enter the market. This is called a barrier to entry.

FOCUS: As you read, pay attention to barriers to entry that lead to monopolies.

If perfect competition is a market where firms have no market power and they simply respond to the market price, a monopoly is a market with no competition at all, and firms have a great deal of market power. In this case, one firm produces all the output in a market. Since a monopoly faces no significant competition, it can charge any price it wishes, subject to the demand curve. While a monopoly refers to a single firm by definition, people often use the term in practice to describe a market in which one firm merely has a very high market share. While a monopoly must be concerned about whether consumers will purchase its products or spend their money on something altogether different, the monopolist need not worry about the actions of other competing firms producing its products. As a result, a monopoly is not a price taker like a perfectly competitive firm, but instead exercises some power to choose its market price.  

In some cases, barriers to entry may lead to monopoly. 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. 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 necessarily 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.