Thus, in markets with significant barriers to entry, it is not necessarily true that abnormally high profits will attract new firms, and that this entry of new firms will eventually cause the price to decline so that surviving firms earn only a normal level of profit in the long run. Barriers may block entry even if the firm or firms currently in the market are earning profits. In other cases, they may limit competition to a few firms. In some cases, barriers to entry may lead to monopoly. Once an entrepreneur or firm has purchased the rights to all of them, no new competitors can enter the market. For example, there are a finite number of radio frequencies available for broadcasting. Barriers to entry can range from the simple and easily surmountable, such as the cost of renting retail space, to the extremely restrictive. Barriers to entry are the legal, technological, or market forces that discourage or prevent potential competitors from entering a market. These profits should attract vigorous competition as we described in Perfect Competition, and yet, because of one particular characteristic of monopoly, they do not. Analyze the importance of trademarks and patents in promoting innovationīecause of the lack of competition, monopolies tend to earn significant economic profits.Explain how economies of scale and the control of natural resources led to the necessary formation of legal monopolies.Distinguish between a natural monopoly and a legal monopoly.The amount of rivalry can change radically due to changes in demand.By the end of this section, you will be able to: Supply changes slowly due to market signals so price responds strongly to changes in demand. The size and composition of the industry is static and changes slowly. Industries that are difficult to enter and difficult to exit are shown in Figure 4. However, during period of low profitability, competitors leave the industry easily. Competitors have a difficult time entering the industry during times of good profitability. It has limited industry rivalry and tends to have good profitability. However, when profitability falls, it is difficult to leave the industry so profitability remains low.Ĭonversely, an industry that is difficult to enter but easy to leave is shown in Figure 2. At the first sign of excess profitability in the industry, competitors flock to the industry. As shown in Figure 1, an industry that is easy to enter but difficult to leave has intense industry rivalry and low profitability. If we combine entry and exit, we can predict industry rivalry, stability and profitability. High fixed costs - High levels of dedicated fixed costs tend to be an impediment to leaving an industry.Specialized skills - Highly specialized skills by industry participants that cannot be utilized in other industries tend to be an impediment to leaving the industry.Investment in specialist equipment - Investments in specialized equipment that cannot readily be used in other industries tends to be an impediment to leaving the industry.Government standards - Industries where rigid industry standards exist tend to have limited entry.Permitting requirements - Industries where permitting and licenses are required to establish production tend to have limited entry.Established brand identity - Industries dominated by branded products are difficult to enter due to the large amount of time and money required to create a competing branded product.High switching costs - The tendency for buyers of an industry’s products to be reticent about switching to a new supplier tends to limit entry.Intellectual property - Patents and other types of proprietary intellectual property are very effective in limiting industry entry.Capital intensive - A large capital investment per unit of output in facilities tends to limit industry entry.Economies of size - The need for a large volume of production and sales to reach the cost level per unit of production for profitability is a barrier to entry.Some of the common barriers to entry and exit are listed below. On the other end, industries that are difficult to exit have more rivalry than industries that are easy to leave. So, rivalry among competitors can be intense. Conversely, industries that are easy to enter attract new companies into the industry during periods of profitability. In general, industries that are difficult for new competitors to enter may enjoy periods of good profitability and limited rivalry among competitors. A barrier to exit is something that blocks or impedes the ability of a company (competitor) to leave an industry. Teaching activity Barriers to Entry and ExitĪ barrier to entry is something that blocks or impedes the ability of a company (competitor) to enter an industry.
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