Barriers to Entry of New Firms
Barriers to Entry of New Firms
For a firm to maintain its monopoly position there must be barriers to entry of new firms. Barriers also exist under oligopoly, but in the case of monopoly they must be high enough to block the entry of new firms. Barriers can be of various forms.
• Economies of scale. If a monopoly experiences substantial economies of scale, the industry may not be able to support more than one producer.
• Network economies. When a product or service is used by everyone in the market, there are benefits to all users from having access to other users. Thus eBay, by providing such large network economies makes it very difficult for other online auction houses to compete.
• Economies of scope. A firm that produces a range of products is also likely to experience a lower average cost of production. For example, a large pharmaceutical company producing a range of drugs and toiletries can use shared research, marketing, storage and transport facilities across its range of products. These lower costs make it difficult for a new single-product entrant to the market, since the large firm will be able to undercut its price and drive it out of the market.
• Product differentiation and brand loyalty. If a firm produces a clearly differentiated product, where the consumer associates the product with the brand, it will be very difficult for a new firm to break into that market.
• Lower costs for an established firm. An established monopoly is likely to have developed specialized production and marketing skills. It is more likely to be aware of the most efficient techniques and the most reliable and/or cheapest suppliers. It is likely to have access to cheaper finance. It is thus operating on a lower cost curve. New firms would therefore find it hard to compete and would be likely to lose any price war.
• Ownership of, or control over, key inputs. If a firm governs the supply of vital inputs (say, by owning the sole supplier of some component
For a firm to maintain its monopoly position there must be barriers to entry of new firms. Barriers also exist under oligopoly, but in the case of monopoly they must be high enough to block the entry of new firms. Barriers can be of various forms.
• Economies of scale. If a monopoly experiences substantial economies of scale, the industry may not be able to support more than one producer.
• Network economies. When a product or service is used by everyone in the market, there are benefits to all users from having access to other users. Thus eBay, by providing such large network economies makes it very difficult for other online auction houses to compete.
• Economies of scope. A firm that produces a range of products is also likely to experience a lower average cost of production. For example, a large pharmaceutical company producing a range of drugs and toiletries can use shared research, marketing, storage and transport facilities across its range of products. These lower costs make it difficult for a new single-product entrant to the market, since the large firm will be able to undercut its price and drive it out of the market.
• Product differentiation and brand loyalty. If a firm produces a clearly differentiated product, where the consumer associates the product with the brand, it will be very difficult for a new firm to break into that market.
• Lower costs for an established firm. An established monopoly is likely to have developed specialized production and marketing skills. It is more likely to be aware of the most efficient techniques and the most reliable and/or cheapest suppliers. It is likely to have access to cheaper finance. It is thus operating on a lower cost curve. New firms would therefore find it hard to compete and would be likely to lose any price war.
• Ownership of, or control over, key inputs. If a firm governs the supply of vital inputs (say, by owning the sole supplier of some component
References: http://classof1.com/homework-help/economics-homework-help/