Economics Perfect Competition Questions Medium
In perfect competition, barriers to entry refer to the obstacles or conditions that prevent new firms from entering the market and competing with existing firms. These barriers can significantly impact the level of competition within an industry and ultimately affect market outcomes.
One of the key characteristics of perfect competition is the absence of barriers to entry. In a perfectly competitive market, there are no restrictions or hindrances that prevent new firms from entering the market. This means that any firm can freely enter or exit the industry without facing any significant obstacles.
However, in reality, perfect competition is rarely observed due to the presence of various barriers to entry. These barriers can be classified into two main categories: structural barriers and strategic barriers.
Structural barriers are inherent to the industry and arise from factors such as economies of scale, capital requirements, and access to resources. Economies of scale occur when larger firms have a cost advantage over smaller firms, making it difficult for new entrants to compete on price. Capital requirements refer to the significant amount of financial resources needed to establish and operate a business in certain industries. Limited access to resources, such as raw materials or distribution channels, can also act as a barrier to entry.
Strategic barriers, on the other hand, are intentionally created by existing firms to deter new entrants. These barriers can include tactics such as predatory pricing, exclusive contracts, or extensive advertising and branding. Predatory pricing occurs when established firms temporarily lower their prices to drive new entrants out of the market. Exclusive contracts with suppliers or distributors can limit the access of new firms to crucial inputs or distribution channels. Extensive advertising and branding can create strong customer loyalty towards existing firms, making it difficult for new entrants to gain market share.
Overall, barriers to entry in perfect competition play a crucial role in shaping the level of competition within an industry. When barriers are low or non-existent, new firms can easily enter the market, increasing competition and potentially leading to lower prices and improved consumer welfare. However, when barriers are high, existing firms can enjoy market power and limit competition, potentially resulting in higher prices and reduced consumer choice.