compete with the provider of local land-line telephone services without
having to establish an expensive network of wires, thus allowing
successful competition at a much smaller scale of operations. In addition,
Skype, Facetime, and other Internet-based substitutes to land-line
telephone services are further eroding the market power of the traditional
phone companies.
Entry barriers are often circumvented by the innovation of production processes and the
development of new goods and services. Such innovation explains why monopolies rarely
persist over long periods.The distinguished economist Joseph Schumpeter (1883–1950) took the
view that entry barriers were not a serious obstacle in the very long run.
He argued that the short-run profits of a monopoly provide a strong
incentive for others, through their own innovations and product
development, to try to usurp some of these profits for themselves. If a
frontal attack on the monopolist’s entry barriers is not possible, the
barriers will be circumvented by such means as the development of
similar products against which the monopolist will not have entry
protection. Schumpeter called the replacement of one product by another
the process of creative destruction. “Creative” referred to the rise of new
products; “destruction” referred to the demise of the existing products
and perhaps the firms that produced them. Some old and current
examples are presented in Lessons from History 10-1.
Lessons from History 10-1