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Barriers to Entry

By ginevraginni Mar 17, 2012 1035 Words
Explain how barriers to entry may affect market structure

In some market it is easier to enter than in others due to the barriers to enter. Those barriers determine how many producers there will be in a market and therefore its structure. If there are lot of barriers to entry there will be market structure such as monopoly or oligopoly; if there are no barriers to entry, or just few of them, there will be market structure such as perfect competition or monopolistic competition. When the barriers to entry are lots and strong, another producer will not be able to enter into the market because the costs and difficulties are too high, we will find a monopoly. In this type of market structure there are different kind of barriers to entry. Firstly, there are legal barriers where the government can create a monopoly because of its law system. For example, in UK only pharmacy can give prescription for drugs. Secondly, there are resource barriers where a monopolistic firm is able to buy all the resource available and therefore others firms won’t have any possibility to set up. For example, in Italy there is only one electric company that bought all the resources available and Italian consumers have just one supplier of electricity. Thirdly, a monopoly can practise an unfair competition so if another firm tries to enter into the market the monopolistic firm will lower its price and therefore the prices to enter will be to high for the entrant. For example, frequently in the past Microsoft has been accuse to practise anti-competitive strategies to ensure its monopoly of its operative system. Another reason for which there is a monopoly is that a firm can produce a desired output at a lower social cost than two or more firms. This particular type of monopoly is said to be natural. A common example of a natural monopoly is the rail industry where the consumers prefer to have just an industry so the environment is not damage.

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In the monopoly there is only one firm that is price maker therefore it can decide which price set or output produce. It cannot, however, charge a price that consumers will not bear. The demand will therefore be down sloping and quite inelastic because consumers have only one supplier so there are no substitutes. In the oligopoly there are only few firms that control the industry with significant barriers to entry that avoid other firms to enter into the market to take advantage of the abnormal profit. In the oligopoly we can find different barriers to enter such as the permission of the government to set up, the start up costs really high or the resources ownership. In my city in Italy, Lucca, there are only to big supermarkets because they bought all the land available to build up and therefore if another firm want to enter into the market it doesn’t have the resource to start. .[pic]

The demand curve for the oligopoly is more or less the same as the monopoly because of the barriers to enter consumers have just few substitute and therefore the firms are still price makers. The prices in oligopoly are lower than in monopoly because there is a price war between firms. If a firm lower its price also the other firms will have to lower it. When there are no barriers to enter we will have a perfect competition. In this type of market structure there is freedom to enter and exit from the industry due to the absence of barrier to entry. So there will be lot of firms that have no power to influence the price, therefore firms are price takers.

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As we can see from the graph, the demand curve is perfectly elastic because there are no barriers to entry. In there are industry there are lot of firms supplying the same identical product, therefore the consumer will be able to decide from the different producers. Also in the monopolistic competition there are no barriers to entry; the different between this type of market structure and perfect competition is the product differentiation. Therefore the consumer will be able to buy different kind of product instead than having an identical product as in the perfect competition. [pic]

As we can see from the graph the demand curve of monopolistic competition is more inelastic than in perfect competition because the consumer can decide which product to buy but more elastic than in monopoly and oligopoly due to the absence of barriers to entry.

Evaluate the view that monopoly is an undesirable type of market structure

There are different reason why a monopoly is against the public interest. Firstly, a monopolistic firm sets up higher prices and produces a lower output compare to the perfect competition. [pic]
This graph compares perfect competition to monopoly. As it shows the graph the monopolist will produce Qm at a price Pm. This is where MC=MR. If the same industry operated under perfect competition, it will produce at Qpc and at the price Ppc. Therefore under perfect competition the same industry produces a higher quantity for a lower price. These happen when we assume that those market structures have the same average cost and the same marginal costs. Under perfect competition, the lack of barriers to entry eliminates abnormal profits and force firms to at the bottom of their average cost in the long run; therefore long-run prices will keep down. Under monopolistic competition, barriers to entry allow profit to remain abnormal also in the long-run and therefore the monopolistic firm cannot operate at the bottom of its average cost; so price will be higher and output lower. Monopoly could also not use the most efficient technique because it has less incentive because of barriers to entry. The monopolist also if it uses a less efficient technique will still make a large profit. On the other hand, in perfect competition a firm in the long run has to use the most efficient techniques and wherever possible it develops new ones. Monopoly may also lack the incentive to produce new product varieties because they are already earning a large profit.

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