Question

Chose an industry you are familiar with and discuss the current barriers to entry. How great is the threat of new entry into the market? Are there any switching costs? Does this industry have problems with substitute products? Reply to other student’s posts with a suggestion on how to lessen or increase current barriers to entry

Answer 1

Barriers to entry exists mainly is monopoly market where there is a single seller and everyone can not enter into that market. There are various reasons for this situation. Barriers can be due to huge cost involved, patents rights, geographical conditions, risks involved in producing the product etc. That is why it is not easy to enter.

I think we should go for sofdrink industry to understand it. In this industry there are various firms like coca cola which dominate the softdrink market. Coca cola has huge brand loyalty which makes it differnt from others. Because of the brand, people prefer coca cola over other softdrinks. In gaining brand loyalty, coca cola has invested huge amount of money in marketing and advertising the product. Therefore a firm who wants to operate in the same industry would have to invest huge in its advertising. If you remember, a virgin cola was launched in the market but it could not do well beacuse of competition like coca cola. Therefore huge cost is acting a barrier in this industry.

Threats to this industry are great as if a firm is able to invest huge cost, it can enter the market. And if we talk about tastes and preferences, it becomes very difficult for some people to make difference. And some portion of population can move to the other firm.

Therefore due to above reasons industry have problems with substitue goods. But this is not in case of every competitor because it is not easy to effect such an established brand. Therefore there is a little problem with substitute goods.

Switching cost refers to the cost associated while changing supplier. For example cost involved in breach of contract, damages caused etc. In softdrink industry, there is no switching cost for customer. He can easily switch to the other brand if he wants to. So this can also act as an threat for coca cola.