In a natural monopoly, what deters new sellers from entering the market?
A)The existing seller has higher costs and profits than what the new entrant will face.
B)Marginal revenue will be higher for new entrants, making profits less probable.
C)The new seller would have much higher costs than the existing large seller in the market.
D)The existing monopolist has long-term contracts with buyers.

Question

Quizplus · Accepted Answer

In a natural monopoly, the existing firm has already invested in expensive infrastructure and has significant economies of scale, making it difficult and costly for new entrants to compete. The high fixed costs associated with entering the market act as a barrier to entry, creating a situation where the existing monopolist is able to maintain its position in the market. Choice A is incorrect because the existing monopolist has lower costs due to economies of scale. Choice B is incorrect because marginal revenue is the same for all sellers in a monopoly market. Choice D is incorrect because long-term contracts may not necessarily deter new entrants from entering the market.

In a Natural Monopoly, What Deters New Sellers from Entering