Question

After watching the video clip from Forrest Gump, consider that Forrest’s good luck of “being in the right place at the right time” allowed him to operate as a monopoly. Typically, the fishing industry is a highly competitive industry where economic profits are rarely made in the long run. However, in a twist of fate, Forrest’s boat is the lone survivor after a hurricane washes ashore and destroys all the other shrimp boats.

Consider the barriers to entry facing potential competitors in Forrest’s monopoly market. The more contestable a market, the closer it will be to a perfectly competitive market, whereas the less contestable a market, the closer it will be to a monopoly.

What barriers to entry exist in other industries that allow certain firms to operate as a monopoly?  Are these barriers contestable?

Answer 1

The barriers to entry that exist in other industries that allow certain firms to operate as a monopoly are as follows:

a. Patents/Copyrights: When a firm introduces anew product, it gets patent rights from the government. This prevents others to use the same production process or produce the same product. For example, medicines.

b. Control over the essential raw material - For example, in case of OPEC where countries have control over oil producing mines.

c. Grant of Franchise by the government - Sometimes government gives exclusive legal right to produce a given product or service in a particular area or region.

d. Economies of Scale : This is seen in case of natural monopoly. When long run average cost keeps on falling over a wide range of output level such that single firm can meet the demand of an entire market , it is called a natural monopoly and they are regulated by the government.

e. Advertising and Brand Loyalties of established firm: Huge advertising campaigns and customer service programs are undertaken to enhance market power and prevent entry of potential competitors.

Out of the above mentioned barriers of entry, control over essential raw material, grant of franchise by the government and economies of scale cannot be contested . patents con be contested but after a certain time period when the patent right ends. The only barriers to entry that can be contested are - advertising and Brand loyalties of the established firms.