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Barriers to Entry: Economies of Scale and Sole Ownership of a Factor

Economies of Scale and Other Cost Advantages

Cost barriers to entry are a weaker form of barrier than those mentioned above. This form of barrier to entry is not a legal restriction and technically, any firm that wants to enter the industry can enter the industry.

However, the costs associated with entering the industry are so high that no capital-holders are willing to risk the money. These cost restrictions result, in some cases, from very high economies of scale. Thus, potential entrants simply stay out of the business.

There are many industries that have very high entry costs, sometimes because production costs are so high, sometimes because marketing costs are so high. But some economists argue that, eventually, if the potential profit is there, a venture capitalist will take the risk and enter the market.

Ownership of a Scarce Factor of Production

The final type of barrier to entry is the easiest to understand. If the firm is the sole owner of a resource that is used in production, then it can be the only producer. An example is the DeBeers company, which used to own most of the world’s diamond mines (though now competition from Russia and Angola threaten their monopoly).

REALITY CHECK: Think of all those ads you’ve seen on television and in magazines for diamonds…have you ever read the fine print to see whose ad it was?

The resource, though, does not have to be land; it can also be labor. An artisan is the sole owner of a particular artistic skill and is a monopolist in the production of his or her art.



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