9781118041581

Barriers to Entry

A barrieris any factor that blocks or impedes entry of new firms into a partic-

ular market. There is a wide variety of barriers to entry that are more or less

important, depending on the market under consideration. In some cases, one

or more of these barriers are sufficient to support a single dominant firm in the

market. In others, entry barriers are not absolute but limit the market to a

small number of firms. It is also useful to speak of barriers to competition—that

is, factors that, while not precluding rivals from the market, insulate a given

firm from direct competition. Sources of entry barriers include the following.

ECONOMIES OF SCALE When average cost falls significantly with increases

in scale, a new firm must enter the market with a large market share to be com-

petitive. If this addition to industry output requires a significant drop in mar-

ket price, entry will be unprofitable. In so-called natural monopolies, average

cost continually decreases with output, implying that a single firm achieves the

lowest possible unit cost by supplying the entire market. For instance, it is

322 Chapter 8 Monopoly

FIGURE 8.2

Possible Industry

Demand Curves

The industry demand

curve facing a

monopolist might be

D 1 , D 2 , or D 3. Only

curve D 1 affords the

opportunity for

significant economic

profits.

Dollars per Unit of Output

D 3

D 1

D 2

AC

Output

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