"Monopolies exist mainly because monopoly firms create barriers to entry by manipulating their prices to keep potential competitors from contesting their markets." Do you agree with this argument? [15]
In this essay, the thesis presented would be artificial barriers being used by firms as indicated by ‘create’. As manipulating prices was given as the method to keep potential competitors from entering their markets, the specific arguments would be limit pricing and predatory pricing as the artificial barriers. On the flip-side, the anti-thesis would be artificial barriers created by government and natural barriers already present. Hence, this essay seeks to first explain how limit pricing and predatory pricing are being used by firms before going on to explain some artificial barriers created by the government such as licenses and patents as well as some natural barriers such as reaping substantial economies of scale and a natural monopoly. The essay would then conclude by evaluating which kind of barriers is more effective in keeping potential competitors from entering a monopoly’s market.
Firstly, limit pricing is where the monopoly sets the price of its goods lower than the average cost of that of a potential entrant. This would greatly deter the potential entrant from wanting to enter the market as he would lose out by being unable to earn any profits unlike the monopoly. As such, it is evident how a monopoly can utilize limit pricing as a mean to keep potential competitors from entering the market.
Secondly, predatory pricing is whereby the monopoly sets the price of its goods lower than the average cost of that existing competitor in the market. This would enable the monopoly to successfully remove his competitor from the market since the competitor would start to make losses and become unable to survive in the market. This would in turn deter potential competitors from entering the market as they would not want to end up in the same situation as that competitor which was defeated, showing how predatory pricing is effective in keeping new competitors from entering.
Besides manipulating prices by firms, the government can also keep potential competitors from entering the monopolies’ market through issuing of licenses and patents. Licenses and patents from the government give the monopolies the legal authority and right to produce their goods which are therefore even more differentiated and new firms are prevented from entering by law. This illustrates how the government, and not the firms themselves, can create artificial barriers to disallow potential competitors from entering the market.
On the other hand, natural barriers also exist. Large firms like monopolies already existing in the market reap substantial economies of scale. This keeps potential competitors out of the market as the start-up costs are very high and it is thus very hard for them to survive in the industry, thus deterring them from entering.
Another natural barrier would be a natural monopoly which already has high barriers to entry to begin with, allowing it to keep potential competitors from entering the market. [NOTE: Economics tutor's comments on this short sentence: This is not really the case; it’s more of the fact that no two firms can exist in the market at the same time because of the falling LRAC throughout the entire range of demand.]
[Insert diagram of Natural monopoly]
In conclusion, artificial barriers are usually more effective than natural barriers in keeping potential competitors from entering the market of monopolies. This is due to the fact that monopolies are mostly run by governments who then can create artificial barriers on their own. At the same time, it is also within the control of the firms to create their own barriers, especially by manipulating prices, to keep their competitors out of the market.
JC Economics Essays - standard 'A' level H2 Economics essay: Tutor's comments on the essay - Special thanks to A.G. for her contribution, as well as the econs students behind this very impressive work. Other than the section in which I had to explicitly correct the students' written work, this essay is still generally quite good. Why is this essay good, and what makes it worthy of a grade A? It addresses the question and generally gets to the point quickly. It identifies the theme and then does a very good job of trying to address the parts of the question that help to get good grades. Although the student did require me to address one section by writing in an explicit comment on the concept, the general idea was still there, and overall the paper was quite good, especially with the natural monopoly diagram. Think of how to draw the economics diagrams for all your essays properly, and be careful as to what they look like. All the best, and think of how you could do better. Thanks for reading and cheers!
