Market Competition Timing and Risks while entering or exiting a market - Essay Example

The researcher states that for example, Amazon.com started its business as an online bookshop but as gradually the demand for the grocery items had increased, Amazon.com adhering to that demand and started its first online grocery shop. As we see in the case of Monopoly where there are no competitors and therefore firms set a price to maximize profit and gain the first mover advantage. Whereas in a perfect competition there are no entry and exit barriers so the role of time in deciding the entrance or exit from the market is minimal and perfectly competitive firms are free to enter and exit an Industry and so in the case of Monopolistic competition in which there is a relative freedom of entry and exit out of industry but a difference between those two terms is that in Monopolistic competition the firms are not ‘perfectly’ mobile but they remain unrestricted by any government rules and regulations, start-up costs or any substantial barrier to entry which is the total opposite of Oligopoly in which there are significant barriers to entry where time plays a major role in determining the entry and exit from the market.

A firm has to evaluate several factors in order to determine the risks of new entrants and the reasons to exit a market which include “economies of scale, product differentiation, capital requirements, access to distribution channels, cost disadvantages independent of scale and government policies”. The term Economies of scale refers to increase the production of a commodity due to which the per-unit cost is of a commodity is reduced. This will create a risk for the new entrant firms in a sense that they would have to produce a larger quantity at a lower price.

Economies of scale encourage the firms to exit the market that cannot produce the required quantity and it deters the smaller firms from entering into the market. These bigger firms forces the new entrants to either come in on a large scale or to accept a cost disadvantage (Porter, 1979). Product differentiation is a risk for entering into the market because it requires incurring expenditure and great deal of money to make the product differentiate among its competitors. Another type of risk is capital requirement where new entrants are required to invest larger amounts to compete efficiently in an industry; particularly if the capital is required for the research and development.

The initial cost to operate can be so large that it restricts all but the larger firms. The capital is not only required for fixed facilities but also for the inventories and absorbing start-up losses. While bigger firms have the financial resources to tap any industry but the huge capital investments in industries such as mineral extraction and computer manufacturing has major risks and limits the pool of entrants. Even the big firms do compete in this trio there is still no guarantee for success.

Access to distribution channel is another type of risk in which a firm needs to obtain distribution for the channel and the distributors are not likely to deliver the product until they are paid good incentives and that will lead to profit reduction for the firm. For example, a new food product enters