Barriers to Entry and How They Benefit Leading Firms

Topics: Economics, Competition, Barriers to entry Pages: 2 (484 words) Published: April 25, 2013
There are several barriers to entry which help an existing leading firm earn positive economic profits in imperfectly competitive market structures. These barriers are: the financial burden of non-price competition, legal barriers, economies of scale, and the large expenditure for capital to enter certain industries. A firm that wishes to enter into an imperfectly competitive market must bear the cost of differentiating its product or service from that of the existing firms. This includes switching costs for technological products or services like smart phones, software, or websites. Consumers have to learn how to use the new product which can be a deterrent to them switching products. Once a product is differentiated, the new firm must then engage in more non-price competition and advertise for consumer awareness. Marketing and advertising be of great cost to a new firm especially when they are competing against existing leading firms. Legal barriers such as patents, licenses, and copyrights can protect the holder from competitors. These barriers are commonplace in the electronics, publishing, engineering, and pharmaceutical industries. They prohibit a new firm from producing, using, selling, or copying the product or invention. In some industries, simply the fact that a firm is large will give it the advantage of economy of scale allowing for efficient, low-cost production. Over time that firm will see a declining average total cost. New, smaller firms will not be able to realize those economies therefore will not realize significant profits. Another barrier to entry for new firms is the large capital expenditure required to obtain necessary plants and equipment for a product. Industries like aluminum and diamonds are examples of markets which have large capital requirements for entry. De Beers is a private collection of companies concerned with the mining and trading of diamonds world-wide. De Beers is well-known for its monopolistic behavior...
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