Answer on Macroeconomics Question for Jimmy Vo
product or service. Three conditions characterize a monopolistic market
structure. First, there is only one firm operating in the market. Second, there
are high barriers to entry. These barriers are so high that they prevent any
other firm from entering the market. Third, there are no close substitutes for
the good the monopoly firm produces. Because there are no close substitutes,
the monopoly does not face any competition.
Barriers to entry. A barrier to entry is anything that prevents firms from
entering a market. Many types of barriers to entry give rise to a monopolistic
market structure. Some of the more common barriers to entry are
Patents: If a firm holds a patent on a production process, it can legally
exclude other firms from using that process for a number of years. If there are
no other production processes that can be used, the firm that holds the patent
will have a monopoly.
Large start-up costs: In some markets, firms will face large start-up costs—for
example, the cost of building a new production facility. If these start-up
costs are large enough, most firms will be discouraged from entering the
Limited access to resources: A monopolistic market structure is likely to arise
when access to resources needed for production is limited. The market for
diamonds, for example, is dominated by a single firm that owns most of the
world's diamond mines.
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