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Government limitations on competition used to be even more common in the United States. For most of the twentieth century, only one phone company—AT&T—was legally allowed to provide local and long distance service. From the 1930s to the 1970s, one set of federal regulations limited which destinations airlines could choose to fly to and what fares they could charge; another set of regulations limited the interest rates that banks could pay to depositors; yet another specified what trucking firms could charge customers.

What products are considered utilities depends, in part, on the available technology. Fifty years ago, local and long distance telephone service was provided over wires. It did not make much sense to have multiple companies building multiple systems of wiring across towns and across the country. AT&T lost its monopoly on long distance service when the technology for providing phone service changed from wires to microwave and satellite transmission, so that multiple firms could use the same transmission mechanism. The same thing happened to local service, especially in recent years, with the growth in cellular phone systems.

The combination of improvements in production technologies and a general sense that the markets could provide services adequately led to a wave of deregulation    , starting in the late 1970s and continuing into the 1990s. This wave eliminated or reduced government restrictions on the firms that could enter, the prices that could be charged, and the quantities that could be produced in many industries, including telecommunications, airlines, trucking, banking, and electricity.

Around the world, from Europe to Latin America to Africa and Asia, many governments continue to control and limit competition in what those governments perceive to be key industries, including airlines, banks, steel companies, oil companies, and telephone companies.

Vist this website for examples of some pretty bizarre patents.

Intimidating potential competition

Businesses have developed a number of schemes for creating barriers to entry by deterring potential competitors from entering the market. One method is known as predatory pricing    , in which a firm uses the threat of sharp price cuts to discourage competition. Predatory pricing is a violation of U.S. antitrust law, but it is difficult to prove.

Consider a large airline that provides most of the flights between two particular cities. A new, small start-up airline decides to offer service between these two cities. The large airline immediately slashes prices on this route to the bone, so that the new entrant cannot make any money. After the new entrant has gone out of business, the incumbent firm can raise prices again.

After this pattern is repeated once or twice, potential new entrants may decide that it is not wise to try to compete. Small airlines often accuse larger airlines of predatory pricing: in the early 2000s, for example, ValuJet accused Delta of predatory pricing, Frontier accused United, and Reno Air accused Northwest. In 2015, the Justice Department ruled against American Express and Mastercard for imposing restrictions on retailers who encouraged customers to use lower swipe fees on credit transactions.

In some cases, large advertising budgets can also act as a way of discouraging the competition. If the only way to launch a successful new national cola drink is to spend more than the promotional budgets of Coca-Cola and Pepsi Cola, not too many companies will try. A firmly established brand name can be difficult to dislodge.

Summing up barriers to entry

[link] lists the barriers to entry that have been discussed here. This list is not exhaustive, since firms have proved to be highly creative in inventing business practices that discourage competition. When barriers to entry exist, perfect competition is no longer a reasonable description of how an industry works. When barriers to entry are high enough, monopoly can result.

Barriers to entry
Barrier to Entry Government Role? Example
Natural monopoly Government often responds with regulation (or ownership) Water and electric companies
Control of a physical resource No DeBeers for diamonds
Legal monopoly Yes Post office, past regulation of airlines and trucking
Patent, trademark, and copyright Yes, through protection of intellectual property New drugs or software
Intimidating potential competitors Somewhat Predatory pricing; well-known brand names

Key concepts and summary

Barriers to entry prevent or discourage competitors from entering the market. These barriers include: economies of scale that lead to natural monopoly; control of a physical resource; legal restrictions on competition; patent, trademark and copyright protection; and practices to intimidate the competition like predatory pricing. Intellectual property refers to legally guaranteed ownership of an idea, rather than a physical item. The laws that protect intellectual property include patents, copyrights, trademarks, and trade secrets. A natural monopoly arises when economies of scale persist over a large enough range of output that if one firm supplies the entire market, no other firm can enter without facing a cost disadvantage.

Problems

Return to [link] . Suppose P 0 is $10 and P 1 is $11. Suppose a new firm with the same LRAC curve as the incumbent tries to break into the market by selling 4,000 units of output. Estimate from the graph what the new firm’s average cost of producing output would be. If the incumbent continues to produce 6,000 units, how much output would be supplied to the market by the two firms? Estimate what would happen to the market price as a result of the supply of both the incumbent firm and the new entrant. Approximately how much profit would each firm earn?

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Questions & Answers

why does a firm continue operating at a breakeven point
Prince Reply
to retain its customers for later coming profits.
tesfie
what economic trend can we expect after lifting of 10 year long sanctions in an national economy?
tesfie Reply
difference between change in demand and change in quantity demanded
Maurice Reply
how
kumar
how to change
kumar
For a demand with repect to price. change in demand refers to the shifting of demand curve, where as change in quantity demanded means movement along the given demand curve.
Farooq
According to lional Robbins how did he explain economics
Raphael Reply
He defined economics as a science which studies human behavior as a relationship between ends and scares which has alternative uses.
Emmanuel
What is economics
Nasiru Reply
why are some countries producing inside the ppf
Claire Reply
prove or disprove that balance of trade of trade deficit is a cause of an abnormal demand curve?
Chioma Reply
what's the fixed cost at output zero
Saidou Reply
fixed cost stay the same regardless of the level of output
Luka
what are the differences between change in demand and change in quantity demand
Sulaiman Reply
what is consumers behaviour
Marfo Reply
importance of income
Emmanuel Reply
Tfor settlement of debt. For purchases. For payment of bills. For daily transactions. For social & recreational enjoyment. For business purposes etc
Oyetunde
thanks
Emmanuel
For investment purposes For security purposes For purpose of forecasting & strategizing.
Oyetunde
what is the real definition of economics
jegede Reply
Economics is the study of the use and allocation of (scarce) resources
demsurf
Jegede, what is the "non" real definition of economics then?
Ernest
Economics is a study of how human use limited resources to fulfil their unlimited want
Musa
the study of how a society use scarce factors of production efficiently so as meet aggregate social demand
Marc
what is oligopoly?
Sailo
Oligopoly can be defines as a market where by there is only tmo or more sellers of a commodity
Paamat
Sory not tmo but two
Paamat
incidence of production there is a choice do you agree? justify
Oduro Reply
What is incidence of production? do u mean incidence of tax?
Aryeetey
I want to know about Richard lipsey and robin as the economist and their definition proposed by them
Musa Reply
what are the causes of scarcity And what are the goal scarcity
Musa
scarcity only exist because human wants are unlimited...if human just know how to be contented then scarcity will not exist
Ylaine
what is ment by possibility curve
Ruzaiq
define accounting?teatly
Ahmed Reply
Is the recording, classifying, interpreting record of all transaction
Yuusuf
is still the act of measuring, interpreting and communicating of financial issues
Yuusuf
measuring business or individual finance
Zeyi
Accounting is the process of collecting,recording,classifying,summarizing and interpreting/presenting financial data to the stakeholders for their economic decision making
asri
hi
Otilina
hi
AVIAH
wat is PPC
ALLAJI

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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