Question

A monopoly, unlike a perfectly competitive firm, has some market power. Thus, it can raise its price, within limits, without quantity demanded falling to zero. The main way monopolies retain their market power is through barriers to entry, which prevent other companies from entering monopolized markets and competing for customers.

Consider the market for pharmaceutical products. Patents are granted to inventors of products or processes for a certain number of years to encourage innovation. Without patents, research and development needed to improve pharmaceutical products are unlikely to occur, as nothing would then prevent other firms from stealing ideas and copying products.

Which of the following best explains the barriers to entry that exist in this scenario?

(a) Exclusive ownership of a necessary resource

(b) Legal barriers Increasing returns to scale

(c) Increasing returns to scale

Answer 1

Correct Answer:
(b) Legal barriers Increasing returns to scale

Explanation:
Granting patents and other copyrights to the inventors, is a legal support and protection by the government so that these inventors dedicate the resources, time and efforts to come up with innovative solutions and make this world a better place. For this reason, the government provides the patent. So, it is a legal barrier that creates monopoly in the market as a reward for the inventions and taking huge risks with the investment of resources.