A monopoly, unlike a perfectly competitive firm, assumes some market power. It c

Question

A monopoly, unlike a perfectly competitive firm, assumes some market power. It can raise its price, within limits, without the quantity demanded falling to zero. The main way it retains its market power is through barriers to entry-that is, other companies cannot enter the market to create competition in that particular industry. Consider the market for computer technology. Patents are granted to inventors of a product or process for a certain number of years to encourage innovation. Without the patents, the research and development to improve computer technology is unlikely to take place, because nothing prevents other firms from stealing the idea, copying the product, and producing it. Which of the following best explains the barriers to entry that exist in this scenario? Legal restrictions Economies of scale Control of an essential resource

Explanation / Answer

Legal Restrictions best explains the barriers to the entry that exist in the given scenario.

Explanation:- A monopoly market structure may arise because of following reasons : i) Granting of license by government, ii) Granting of patent rights by the government and iii) Forming a cartel (collective decision making by a group of firms with a view to avoiding competition and securing monopoly control of the market).

Granting of license and granting of patent rights by government serves as legal barrier to the entry of new firms, companies etc. in the market. Granting of Patent rights are basically legal restrictions imposed by the government to prohibit the use of patented technology by others. Patent rights are granted with a view to encourage research and development, and encouraging new discoveries and innovations. 'Patent rights' is the official recognition of the originators/innovators of a new product or technology. Nobody can copy their product or technology without obtaining permission from patent holder.

Conclusion:- Legal Restrictions best explains the barriers to the entry that exist in the given scenario in the question.

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