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 electricity. In this industry, low average total costs are obtained only through large-scale production. In other words, the initial cost of setting up all the necessary power plants and transmission lines makes it risky and most likely unprofitable for a competitor to enter the market.
Which of the following best explains the barriers to entry that exist in this scenario?
-Control over an important input
-Legal barriers
-Increasing returns to scale