Question

If you were planning to go into a business, what barriers to entry would you have to consider in entering that market? Discuss the various market structures and how the market for the business could be associated with each. For example, how would a purely competitive business market differ from an oligopolistic market? Use any combination of market comparisons you wish and discuss the differences between them.

Answer 1

Following are the barriers to entry that need to be considered before going into a business:

a) Ownership of resources- The ownership and control over the inputs in an industry can affect the number of entries into the industry.

b) Patents and copyrights- If there are a large number of patents or copyrights in the industry it might be difficult to sustain the business, due to the lack of sharing of technological inputs and high pressure to develop own technology.

c) Government restrictions- The amount of government policies restricting entry into the industry or various other trade barriers imposed might make it difficult to grow and sustain in the long run.

d) Start-up cost- Acquisition of capital and establishment of business might cost a lot in case of some industries. Also it is really difficult to start making profits in the initial stage of a business. Hence, in the case of high start-up costs it might be risky for someone to enter the markets.

A market structure defines the organization and other characteristics of a market. There are four major types of market structures:

a) Perfect competition- In perfect competition, a large number of firms are there in the industry. No single firm has significant market power. The industry operates at a level where the market demand is equal to the market supply. All firms maximize their profits; goods sold in such a market are not easily distinguishable, i.e., homogeneous; free entry and exit in the market.

b) Monopolistic competition: Similar but differentiable goods are sold in a monopolistic market. The firms have slight amount of market power due to the little differentiation in products. They can affect market prices.

c) Oligopoly- Only a small number of firms exist and they all share a significant amount of market power in the industry. There are barriers to entry and exit in the market and the products can be highly differentiated or homogeneous.

d) Monopoly- A single firm has control over the whole market. Firm has all the market power and can change prices in order to generate higher profits.