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Discuss the major barriers to entry of new firms into an industry and how these barriers can either give rise to or maintain a monopoly company - Essay Example

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A firm in a highly competitive environment will behave differently from a firm facing little or no competition. Usually firms are divided into categories according to…
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Discuss the major barriers to entry of new firms into an industry and how these barriers can either give rise to or maintain a monopoly company
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Extract of sample "Discuss the major barriers to entry of new firms into an industry and how these barriers can either give rise to or maintain a monopoly company"

Download file to see previous pages Such firms face little or, in some cases, no competition at all.
Each firm in perfect competition is a price taker. This means that changes in output by one firm do not shift the industry supply curve sufficiently to alter the price. If the whole industry makes more or less output, the supply will shift and the price will change but not if one firm increases or decreases output, this means each firm can sell all it wants at the given market price. This also indicates that marginal revenue equals price. Since each unit is sold for the same price in such a market structure, marginal revenue also tends to stay constant therefore giving us a straight horizontal line.
However, a monopolist faces a downward sloping demand and is able to set either the price or the output, but not both. A profit maximizing monopolist would choose the output where marginal cost equals marginal revenue. This output will be somewhere over the price range where demand is pricing elastic and will be sold at the price consumers will pay. In most instances, the total revenue for such firms are higher than the cost hence enabling monopolies to earn abnormal profits in the short run as well as the long run. In order for a firm to maintain its monopoly power and abnormal profits there must be barriers to the entry of new firms.
Barriers to entry are specifically designed to prevent potential firms from entering into a market. They provide firms a degree of market power without losing their existing market share. Barrier to entry anything that allows incumbent firms to earn supernormal profits without threat of entry (Boyes and Melvin, 220-222). The barriers that can be used to create or maintain a monopoly include:
The high fixed cost or setup cost can be the toughest obstacle to tackle. The barrier here is access to capital. Only large firm will be able to fund the necessary investment. An established monopoly is likely to have developed specialized ...Download file to see next pagesRead More
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