Identify four reasons for high entry barriers. Briefly explain each reason

Question

What will be an ideal response?

Answer 1

1. Economies of scale. This occurs when a firm faces declining average total cost over the entire range of output that consumers are willing to buy. When this happens, the larger the firm's output, the smaller its per-unit costs, making it difficult for small firms to enter the market since the small firms face much higher average costs. Thus, only a single firm will survive.
2. Government can block entry via legal barriers such as public franchise, government license, patent, or copyright. A public franchise is a firm the government designates will be the only legal provider of a good or service. A government license controls entry into particular occupations, professions, and industries. Patents and copyrights grant exclusive rights to a product that is invented or created.
3. Control over a key resource. If one firm owns the entire (or a great percentage of the) resource needed to produce a final good, it creates a barrier to entry because it limits other producers' access to that resource.
4. Network externalities in supplying the good or service. If a product becomes more valuable when more people use it, then firms with larger outputs (networks) may have advantages over smaller firms.