Four market structures comparison
The four market structures are perfect competition, monopolistic competition, oligopoly, and monopoly. These four market structures are described based on…
Barriers of entry and exit for market structures
Barriers of entry and exit for market structures
Natural (Structural) Barriers to Entry
Economies of scale:
Firms can decrease their average cost of producing for a unit when the production capacity is increasing. In this situation, the existing firms can produce goods and services at a lower cost than a new firm can and it blocks the entrance of new firms. Specially in the monopoly situation, one firm comes to the situation where single firm can produce entire production of the industry.
Network effect:
Network effect says that when there are larger number of participants, it can add a higher value on a business organization. So, existing larger firms always comprises with these kinds of network effects but newcomers usually do not have.
High research and development costs:
Research and development is very important to introduce new products, to improve the quality, to introduce new products and so on. Well established firms can spend sufficient funds on these factors. So, new firms should have a financial capability to compete with existing firms.
Artificial (Strategic) Barriers to Entry
Legal Costs:
To enter some kinds of the industries, newcomers have to pass a legal process. For that, they have to spend time, money and effort. As examples, they have to pay for the lawyers, registration fees and so on. This is a barrier to enter an industry.
Patents and licenses cost:
These barriers are created by the government of a country. Patents mean the exclusive right for producing goods or service for a certain period. Licenses are the government-granted recommendations to do some activity. Both of patents and licences reduce the competition while improving the quality of the goods and services. So, these can be considered as a factor that block the entrance of new firms.