To what extent do barriers to entry affect the profitability in an industry?

Essay by kingkaisai2 October 2006

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The barriers to entry has a heavy affect on the profitability of a business overall. It has two visible effects on profitability- one it may be the cost and second it can be anything that affect the revenue. Barriers to entry are anything that discourages the entry of new firms into the market and are prevalent in markets with few large firms. Examples of barriers to entry are sunk costs; initial capital investment and various other forms that may affect the brand- such as brand proliferation. However, the affect of barriers to entry on the revenue is minimal in the short term and only in the long run does the barrier to entry take full effect or the lack of barrier to entry take full effect.

The term of profitability is a comparative concept used to compare the short term with the long run or the markets with few firm or small firms? The profit is the revenue- cost.

Barriers to entry might affect the profitability through the costs. Barriers to entry can be the cost and this will discourage firms from entering the market. The higher sunk costs or initial capital investment means if the firm enter the market, its profitability in the short run will not be too high as the sunk costs- in the form of fixed cost perhaps- will have to be paid back slowly. The affect of fixed cost can be seen in the following diagram of the costs.

The barrier to entry will also affect the revenue. The barrier to entry in a monopolistic firm is the main reason why the monopoly is able to earn abnormal profit in the long run. Under the contestable market, the lack of barriers to entry states that monopoly will have to charge the lower price in...