Barriers to Entry

 

In Economics, there are various barriers to entry that are responsible for the inefficiency that results in the market control. Generally, it is the monopoly or oligopoly that is basically criticized for being the reasons for being the barriers of entry into a market. But that is not the truth at all. They are not all related to the barrier issues in the market. They do not have a market control in case of the entries.

There are four major reasons are as follows:

  • Resource ownership
  • Patents and copyrights
  • Government restrictions
  • Start up costs

 

What are the barriers to entry actually responsible for?

Barriers to Entry are actually necessary to control the market by way of limiting the number of competitors one would have to face in the market scenario. They make available close substitutes. In the case of the barriers which are limiting the entry in the case of the supply side situation are providing fewer alternatives to the buyers.

This way, the sellers have a greater control over the market than the buyers. If this happens on the demand side, then the seller will not have many options but the buyers here will tend to control the market scenario than the sellers. Let us now look into each one of the barriers:

 

Resource Ownership:

This considered being one of the most important factors. It would give the control for some critical areas in the field to the owner. When there is limited ownership, there is a limited entry into the industry in which you are working.

The best example for this would be the petroleum industries on the globe. If you know that there are ten good companies that supply for the entire world, then the entry of the eleventh company would be a very tough one. In order to do it successfully, the 11th company would have to get ownership for some factor attains stake for some section of the petroleum industry first.

This could be by means of the existing resources from the ten companies. But, if they are not willing, then it is very tough to enter. The other option would be to explore new resources by exploring and discovering by investing in research and development. But this may cost the new firm a lot more.

 

Patents and Copyrights:

It becomes very important to have exclusive rights over certain things. These come for a certain period of time only. They are a great barrier to entry. Patents are a stronger barrier than the copyrights. This is because Patents restrict the commercial idea and its profits to the Patent holder.

 

Government Restrictions:

The government lays down many of the rules and regulations in this entry field. It has the power to even decide who can or cannot stay in the market. For example, if the government says that the right to provide cable TV connection is only for a certain company, all the rest have to stop giving connections. Government rules and regulations are always based on constitutional laws and hence the citizens have to abide by them.

 

Start-Up Cost:

This can be in the form of three types as follows:

  • Acquire capital, which is difficult to build unless a company raises a public issue.
  • Initial operating losses are common, that come along with all businesses.
  • Money spent on the advertising, which forms an important though additional cost.

 

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