Monopolies, Barriers to Entry and How to Construct Them

• Monopolist needs a “barrier” (or obstacle) to entry so that potential competitors can’t get into the Monopolist’s market
• Monopolies earn + long-run and short-run profits that would “normally” attract new entrants (i.e. potential competitors)
• Long-run profits = 0 in competitive firms where any one can enter the market (no barriers)

Types Barriers That Exist and Can Explain
Why a Monopoly Continues to Persist
• Limiting entry by legally granting “entry” authorization to people already in the industry
• AMA, Professional Sports
• New entrants would increase competition -> driving prices (and salaries) down
• Incentive to restrict entry
• Revenue sharing – more revenue shared over more firms -> lower average revenue per team

Types Barriers That Exist and Can Explain
Why a Monopoly Continues to Persist
• Legal
• Patent – exclusive (property) right to the particular ingredients (e.g., Big Pharma)
• Trademark – exclusive right to product name (brand loyalty)
• Granted/protected by the government
• Meant to encourage investment in research and development of new products/drugs
Shkreli claims that the Turing Pharm. is increasing the price for its prescription drug to conduct R&D for new drugs
• Shkreli was able to get a new patent for this drug by showing it could be used to treat a new disease – no new development; just a new application

Types Barriers That Exist and Can Explain
Why a Monopoly Continues to Persist
• Cost Barrier (High Fixed Costs)
• Large Initial Costs for Plant, Equipment (i.e., Capital Structures) can prevent entry
• Aerospace
• Has both economies of scale and
• High Fixed (Plant) Cost to enter market
• Market currently dominated by 2 large manufacturers (Airbus and Boeing)
• Nearly 100% market share (Europe, US and Asia)

Types Barriers That Exist and Can Explain
Why a Monopoly Continues to Persist
• Limited/Scarce Natural Resource
• Entry is limited by “limited” access to the resource
• Oil, Diamonds, Lithium Ion batteries
• Very few places to access the resource
• Once property rights are established – only owner has access to the resource
• Oil – appox 14 major oil producers (really only 3 or 4 are major producers)
• Prior to off-shore drilling and fracking
• Requires cooperation among members to “fix” prices above competitive market price

• “Natural” Monopoly
• Having 1 firm produce the good, rather than several smaller firms, reduces the average cost of production
• “economies of scale” are present
• However, having the government “license” the market to 1 provider can result in “monopoly” like pricing unless they also regulate its price
• Most require firm to set price at ATC + 10% (assumes a normal ROR is ~ 10%)
• “cost plus” pricing

How A Firm Could Limit/Reduce Competition
• Mergers
• Merging with a competitor can
• Reduce competition
• Possible to increase price without worrying about competitor’s offering a lowering price
• Rational for DOJ, FCC, FTC being involved and having to approve mergers

• Conglomerate
• Merger of firms in unrelated industries
Vertical Merger
• Merger of firms upstream/downstream from each other in production stream
• FCC: ownership of more than 1 media type
• Microsoft
• Horizontal Mergers
• Firms in the same industry
• Telecomm industry
• AT&T divestiture
• Verizon/GTE merger; RBOC mergers
• Would the HHI be a valid measure of competitiveness?
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