"Monopolies exist mainly because businesses create barriers to entry by manipulating their prices to keep potential rivals from entering their business markets." Do you agree with this statement? [15]

It can be argued that monopolies indeed exist because of the presence of barriers to entry such as patents, licenses and substantial economies of scale which deter potential entrants from entering their market. These monopolies can also deter the entry of new firms through policies such as anti-competitive pricing. This essay will therefore talk about how artificial barriers to entry, most importantly anti-competitive pricing policies and methods lead to the existence of monopolies, then moving on to the anti-thesis, which is how then natural barriers to entry contribute to the existence of monopolies as well. The essay will conclude with an evaluation of which barrier to entry, artificial or natural barriers, is more significant.

The artificial barrier to entry would arguably be anti-competitive pricing. Anti-competitive pricing could be further broken down into limit pricing, which refers to the case where monopolists set their prices below the expected average costs of a potential entrant, to deter them from entering the market since they will make losses.

Predatory pricing, on the other hand, is a similar concept, except it is used in such a way that existing competitors would be driven out of the market due to the making of subnormal profits. Therefore, anti-competitive pricing allows for the existence of monopolies, since potential and existing competitors are out of the way.

There are also other artificial barriers to entry such as those created by governments. Governments could support the creation of monopolies by giving patents and licenses to certain firms only. The issue of patents means that monopoly rights are given to a firm to produce a new product or use a new process for a specified time period. Such actions of the government can then allow for the existence of monopolies since such firms are given substantial market power.

           

However, the existence of monopolies could also be due to natural barriers to entry, rather than just anti-competitive pricing policies.

One of which would be natural monopolies. A natural monopoly refers to a market where average costs are falling throughout the entire range of market demand, which makes it less costly for one firm to supply the entire market, hence supporting the existence of monopolies.

[Insert diagram on natural monopoly]

As seen from the figure above, if there were to be more than one firm in the market, the AR of each firm is not even enough to cover the LRAC. Therefore, such a situation supports the existence of monopolies since if there is only one firm, the firm could make supernormal profits.

Next, another natural barrier could be substantial (internal) economies of scale, where larger firms could reap more economies of scale and be more cost efficient. This means that potential entrants will have to produce at a large scale in order to compete and this deters them from entering the market. Such deterrence then leads to the existence of monopolies.

In conclusion, artificial barriers could more adequately explain the existence of monopolies. This is because most monopolies are run by governments whom create artificial barriers like patents and licenses to deter potential entrants. Therefore, upon evaluation, the existence of monopolies would be more significantly attributed to artificial barriers as compared to natural barriers. Hence, the statement should read that monopolies exist mainly because of artificial barriers to entry.

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