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Industrial Economics - Essay Example

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It is generally assumed that a firm would be able to survive in an industry only if it is efficient enough to compete with other firms. But, the question of competition within an industry comes only when a firm…
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Industrial Economics
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Download file to see previous pages In fact in many markets there exist some dominating firms which play the roles of market leader. These large firms in order to maintain their market share create some barriers for new firm to enter into the market. (Baldwin, 1995)
Barriers to entry into a particular industry have immense potential to diminish or entirely prevent the normal mechanism of that industry in attracting new firms towards it. To negatively affect competition in an industry along with the welfare of consumers, it is not always necessary for entry barriers to prevent firms from making their entry into that industry forever. In fact, very often these barriers can create significant effect on the performance of the market only by retarding the arrival of new entrants into it. It is of course true that consumer will suffer from monopoly level pricing for long if entry barriers prevent firms from entering into the market indefinitely, but along with this, it is also true that consumers will also suffer if decline in prices from increasing competition is delayed by delayed entry of new firms due to entry barriers. (Geroski, 1995)
The first important contribution in the area of discussion on entry barriers was made by Bain (1956). Bain made an attempt to define an entry barrier in terms of its effect on firms’ profitability. According to Bain if entry barriers exist in an industry then existing firms will be able to earn profits beyond their normal level without inducing other firms to make an entry into the market. Bain had argued that entry of new firms into an industry is determined by the level of advantages that the existing firm in the industry enjoys over the potential new entrants. He made a comparison between established firms’ profit prior to the entry of potential entrants and post entry profit level of new entrants. According to Bain, there will be an entry barrier if an entrant fails to attain the profit levels that established firms used to enjoy before the arrival of ...Download file to see next pagesRead More
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