Barriers to entry

Conditions or circumstances that make it very difficult or unacceptably costly for outside firms to enter a particular market to compete with the established firm or firms that are already selling the good or service involved. These barriers may derive from several causes. Legal or regulatory or other clearly political barriers to entry are historically the most common source of long-lived monopolistic or cartelized conditions in the marketplace, either through overt grants of monopoly to politically favored firms or through the enactment of laws or decrees that have the same effect indirectly by imposing such high costs or delays for qualifying for licensure, permission to import across national boundaries, or other required regulatory clearances to sell in the marketplace that new competition is effectively discouraged without being specifically prohibited. The existence of legally enforceable patent protection may give the incumbent firm a big cost or quality advantage over other potential competitors — at least as long as new and better products or production technologies have not been discovered or acquired by potential entrants. Even without political favoritism, an established firm or firms in the industry may also enjoy large initial cost advantages over new entrants due to the need for very large initial outlays in highly capital intensive industries where the available technology creates substantial economies of scale for the firm that has already made those outlays in the past. Laying out billions of dollars up front to enter a competition where long term success is highly uncertain may involve so much risk that only slightly higher-than-average profits in the industry will be insufficient to bring in new entrants, so if the monopolist is wise enough not to jack up prices too high above marginal costs he may avoid unpleasant competition for many years. Of course if the threat of potential competition causes the monopolist to moderate his behavior in this way, the adverse welfare effects people expect from monopoly may become relatively negligible in the process. (It is often suggested that extensive investment in product differentiation, years of expensive advertising, and the resulting cultivation of brand loyalty among the consumers can create difficult barriers to entry as well, although seemingly brand-loyal consumers often show a remarkable willingness to shift surprisingly quickly to new brands when they find clear evidence of superior quality or a major price advantage in doing so. Brainwashing the public does not come cheap — and it often turns out to be far from permanent!)