Principles of Microeconomics / Unit 8 MIC 0707 worked example, 60 to 90 seconds
Classifying a Barrier
The idea
Given a description of how a firm keeps rivals out, name the barrier. If one firm's average cost keeps falling over the whole market, it is a natural monopoly. If the firm owns an input nobody else can get, it is control of a resource. If the government forbids competitors, it is a legal monopoly. If the firm holds a patent, copyright, trademark or secret, it is intellectual property. If the firm threatens price cuts or makes entry costly to attempt, it is intimidation. Then say whether the barrier is likely to erode.
In practice
Worked example: a regional cement plant whose cost per ton falls out to the whole region's demand is a natural monopoly, eroded only by a new technology with a smaller efficient scale. A firm holding the only known deposit of a mineral controls a resource, eroded by a new deposit or a substitute. A city's one cable franchise is a legal monopoly, eroded by a change in the law or by streaming. A patented drug is intellectual property that expires on a date. A firm that slashes prices whenever a startup appears is practicing intimidation, which antitrust law may reach.
Where people slip
Barriers combine, so a description can fit two categories; name the one that would still block entry if the other vanished. And barriers are not permanent: technology, discovery and law have ended each kind.
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