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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

what the word federal mean
Kabba Reply
Meaning of "movement along curve?
Lizabeth Reply
There is movement along curve whenever the 'price' is affected
Isha
its mean price is positively response as demand change and price is negatively reaponse as supply changes
Mudasir
its mean when quantity demanded of commodity changes due to a change in its price ,keeping other factors constant, it is know as change in quantity demanded.
Gyamfua
pleas wat the formula when calculating for equilibrium point
Irene
when there is increase in the price
sautil
when there is increase in demand, demand will decrease.
Shadrick
A movement along curve is a movement on the curve mainly caused by a change occured in both quantity demand and quantity supplied.
Aarohi
what is demand
Dennis Reply
unwilling to buy good quality at a particular price and a particular time
Musa
Demand is the willingness and ability to buy goods and services at different prices at a given time.
Aarohi
is production function different from psychological law of consumption?
Kshirodra Reply
why supply is not the same quantity supplied
emmanuel Reply
What is Elasticity?
Kamara
I don't even understand
Awuah
what is damand
Cletus
Elasticity is an economic concept used to measure the change in the aggregate quantity demand for a goods or service in relation to price movements of that goods and service.
Gyamfua
Demand is an economic principal referring of a consumers desire to purchase goods and service and willingness to pay a price for a specific goods or service.
Gyamfua
supply is not the same as quantity supplied, because when economic refer to supply, they mean the relationship between a range of price an the quantity supplied those price -are relationship that can be illustrated with a supply curve or supply schedule
Gyamfua
Is a science which study human behavior as a relationship between ends and scares means which have alternative uses
BOOMBA Reply
I dont think so
Mahmood
It is Economic growth and stability
Mahmood
How Economic recovery growth Planning
Mahmood Reply
Expatiate your question
Awuah
Yh
Berry
Are bonds the same as liabilities?
Anderson Reply
Demend create it own supply how?
Mahmood
what is way ofrece thinking
Mahmood
what is the Economic way thinkig?
Mahmood
what is gasoline
Deepak Reply
how to know which products demand
Deepak
in other words economic can be define as what?
Ojarigho Reply
what is the difference between economics activities and economics system
Joshua Reply
what is the difference between price elasticity of demand and income elasticity of demand
Ellen Reply
what is demand
Alpha Reply
What is demand
Musa
is a measure of responsiveness at which a consumer is willing and able to offer a particular product at a given period of time
Manu
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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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