Question

Describe how and why monopolists use barriers to entry to maintain their pricing power.

Answer 1

The main idea behind a monopolist market structure is that it is the sole firm in the market and so it retains its position by using barriers to entry to keep out competing firms. The entry of new firms will mean that prices will be competed down and so this will ruin a monopolists pricing power. The entry of new firms will also mean that they will practice product differentiation and use additional tactics to improve competition and so this willl drive down prices even further. Thus monopolists must use barriers to entry to maintain their pricing power.