Economic Assignment: Entry Barriers to Monopolistic Competition and Asymmetry Information in Market for Used Goods

Running Head: ECONOMIC ASSIGNMENT
Economic Assignment
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1
ECONOMIC ASSIGNMENT
Table of Contents
Answer 1...............................................................................................................................................2
Entry barriers to monopolistic competition........................................................................................2
Patent and Monopoly.........................................................................................................................2
Answer 2...............................................................................................................................................3
Asymmetry information and market for used goods..........................................................................3
References.............................................................................................................................................5

2
ECONOMIC ASSIGNMENT
Answer 1
Entry barriers to monopolistic competition
In the monopolistically competitive market there are usually low barriers to entry.
New firms can enter if the market seems profitable to them. However, there are situation that
may restrict entry of new firms. If the incumbent firms exploit considerable economies of
scale, then new entrants are unable of compete with the existing firms and this deters entry.
Presence of network effect is another thing that prevents entry. When there are high set up
cost most of which are sunk costs then firms do not enter (Nikaido 2015). Sunk costs are cost
that cannot be recovered and exists in the form of advertising cost, cost for marketing and
other types of fixed costs.
Patent and Monopoly
Patent is sole ownership right granted by the government for a specific period. The
government by granting patent creates monopoly for welfare of the society. Paten enhances
technological innovation by giving additional edge to the innovators over its competitors.
Technological innovation requires large scale investment. If the new good invented is sold at
the competitive price, then it would take a long time to recover the fixed cost. The patented
goods are considered as lawful monopoly created with State’s interest to encourage creation
of such goods (Longley 2013). Patents are mostly granted for goods that involve huge fixed
cost. For example, pharmaceutical drugs. The pharmaceutical firms would not make
invention of new drugs if they fail to receive sufficient return to recover costs. Patent is the
mechanism that enables producers to recover their fixed production cost.