- Barriers to entry
- Barriers to entry are the legal, technological or market forces that discourage or prevent potential competitors from entering a market.
- Monopoly
- A monopoly is a market in which one firm produces all of the output, so it faces no significant competition.
Barriers to entry
Can you name five barriers to entry?
Each is a way a firm already in the market keeps rivals from joining it.
Economies of scale are a barrier when they are so large relative to demand that one producer can serve the whole market more cheaply than several smaller ones.
Can you think of an example?
Once a water company lays mains through a neighbourhood, serving one more home costs little. A rival would need a whole second set of pipes to reach the same homes, so its costs would be far higher.
Control of a physical resource is a firm holding most of the supply of a scarce input that everyone in its industry depends on.
Can you think of an example?
When one company controlled most of the bauxite, the mineral aluminium is made from, other firms were simply unable to produce enough aluminium to compete with it.
Legal protection is a law that prohibits or severely limits competition in a market, so the barrier is the law itself rather than cost.
Can you think of an example?
For many years the law reserved the delivery of ordinary letters in the UK to Royal Mail. However profitable post became, no rival was allowed to start a letters service.
A patent gives the inventor the exclusive legal right to make, use or sell the invention for a limited time.
Can you think of an example?
A drug company spends £800 million developing a medicine a rival could copy for £5 million. Without a patent the rival would undercut it and the research would never be repaid.
Predatory pricing is when a firm cuts its prices sharply, often below its own average cost, or threatens to, so that rivals are driven out or deterred from entering.
Can you think of an example?
A large airline slashes its fares on a route the moment a small start-up begins flying it, so the newcomer cannot make money, then raises them again once it has gone.