Alright, so now let's discuss some of those barriers to entry, right? These barriers to entry ensure that other firms cannot enter the market. They're not going to be able to enter because of these barriers. First, we have the ownership of key resources. A notable example is the company De Beers, which supplies diamonds to the industry. For a very long time, they owned substantially all the diamond mines in the world. So you can imagine if you wanted to get into the diamond business, you'd probably have a pretty hard time. You would need some source of diamonds, and De Beers controls all of those sources. If you can't get diamonds, you can't get into the business. You wouldn't be able to supply them, so that was a barrier to entry into that industry. You had no access to this key resource; these other companies already own them, and you have no access. So that could be a barrier to entry.

The next one is government regulation. The government could make a legal barrier to entry. Let’s say you invent some product. If you invent a product, you would go to the government and file for a patent. This patent would give you the exclusive right to produce it. You would be the only one who’s allowed to produce it because you’re protected by the law. You invented it and you have a patent. So if I go ahead and try to produce it, I wouldn't be allowed to. You could sue me, come after me, and get my money. You are legally protected to keep control of that product. So that's a barrier to entry. I'm not able to get into that business and start selling that product because you are the only one that's allowed to produce it.

The last one here is economies of scale. This would be a situation where it makes sense for an oligopoly to form. Economies of scale is a situation where you can increase the quantity you're producing, and by increasing the quantity, your average total costs are going to decrease. Your average total cost per unit is less by producing more units. You're taking advantage of specialization in your workers or getting quantity discounts by buying in bulk, things like that, economies of scale. On the graph here in green, we've got the long-run average total cost of perfect competition and notice how quickly it reaches its minimum efficient scale. Minimum efficient scale is that minimum point where those economies of scale are exhausted. We see on this whole portion, the cost is decreasing as they increase quantity. We're moving to the right and costs are going down. That's economies of scale, but we reach the end of those economies of scale pretty quickly. Look at the demand, how far out it is. Let's pretend that's way over there and this is just a very small portion. Right here, they can only satisfy a very low quantity. They're only going to produce a low quantity, so that's why in perfect competition, it makes sense for there to be many suppliers because they each make such a small little quantity to fulfill this much grander demand. So that would make sense for a long-run average total cost curve in perfect competition, but in an oligopoly look at this yellow curve, look how much more economies of scale they get. Notice how this curve keeps going for a long time to a very low average total cost. They're getting tons of economies of scale, but they still can't supply that demand. The demand is still further to the right. At this minimum average total cost here, they still can't supply the whole amount for demand. So this would say some high quantity compared to the low quantity of perfect competition. So you could imagine if there were say 2 firms in this market, each one supplying this quantity right here. The first one supplying this much quantity and the second one could supply the same amount. If they're the same size, something like that, the 2 of them could get us out to our demand curve. So with 2 companies here, we can naturally fill up the demand. So this could be the situation, you might call this a natural duopoly. Duopoly is a type of oligopoly where we have 2. There's a duo and this is a situation where it's a natural duopoly because the economies of scale make it make sense for this market for just 2 producers to produce it. If we had a bunch of smaller companies produce it, well they wouldn't reach their minimum efficient scale. They would be producing at some higher cost and that would be inefficient. So it just makes more sense for there to be fewer companies when we have a situation like this where there's lots of economies of scale. Okay, so when we dive into the rest of this chapter, we're going to be focusing a lot on these duopolies. We're going to for the most part, while we deal with oligopolies, just talk about a situation where there's 2 firms, okay? Because it's the simplest case, and we can get a lot of information out of that.