Barriers to entry

When there is a monopoly or a duopoly in a sector or industry, you can be sure there are plenty of barriers to the entry of other players in the sector or the industry. Such companies make supernormal profits as they can dictate the price at which their products or services are available to the customers and, therefore, their shares command premium pricing on the stock markets. The stocks of these companies present a lucrative investment proposition, but for the customers, it is a worst case scenario as they are at the mercy of abnormal pricing of these companies.

So what are these barriers to the entry of new players? The barriers are the obstacles that hinder the entry of newcomers into the market. These barriers may be in the form of technology, regulatory challenges, patents, economies of scale, high cost of starting the business, etc.

If the existing players have attained huge economies of scale in their businesses, it is difficult for a new player to attain that scale and, as a result, the cost of production would be higher than the established players. This acts as a deterrent for entry of new players. Also, the established players may resort to predatory pricing to force rivals out of business or deter new entrants into the business. Moreover, if one or two firms have control over a very large chunk of scarce resources required for the business, it creates a very strong barrier to the entry of other players. Besides, if the cost of setting up the business is very high or if huge financial resources are required to be spent on research and development, new players may find it difficult to garner such financial resources.

Such barriers to entry are counter-productive when the industry becomes a monopoly, duopoly or oligopoly and the interests of the consumers are compromised for the sake of generating supernormal profits.