Entry Barriers
If monopoly profits are to persist, the entry of new firms must be
prevented. Anything that prevents the entry of new firms is called an
entry barrier. Such barriers may be natural or created.
Natural Entry Barriers
Natural barriers most commonly arise as a result of economies of scale.
When the long-run average cost curve is negatively sloped over a large
range of output, big firms have significantly lower average total costs than
small firms. Recall from Chapter 8 that the minimum efficient scale (
is the smallest-size firm that can reap all the economies of large-scale
production. It occurs at the level of output at which the firm’s long-run
average cost curve reaches a minimum.
To see how economies of scale can act as an entry barrier, consider the
production of newsprint. Suppose the technology of newsprint
production is such that a firm’s MES is 10 000 tonnes per year at an
average total cost of $500 per tonne. Further suppose that at a price of
$600, the quantity demanded in the entire market is 11 000 tonnes per
year. Under these circumstances, only one firm could operate at or near
its MES. Any potential entrant would have unit costs significantly higher
than those of the existing firm and so could not compete successfully.