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Evaluate the role played by barriers to entry in the long run

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Introduction

Evaluate the role played by barriers to entry in the retention of super-normal profit in the long run. What are barriers to entry? George Stigler defined an entry barrier as "A cost of producing which must be borne by a firm which seeks to enter an industry but is not borne by firms already in the industry". Taken from http://en.wikipedia.org/wiki/Barriers_to_entry [Accessed on 30/07/2010] Basically barriers to entry are obstacles which firms face that make it difficult to enter a particular market. We have barriers to entry in particular markets to protect the existing firms from competitors and larger businesses wanting to expand into a new market. And by doing this they consequently make companies that are already established more valuable as there is a reduced risk of new competition A few examples of barriers to entry are: Patents - Giving a person or a business legal protection around part of a product or a feature that makes it special in its market. A patent denies any other competitors the chance to create and use the same device for a number of years Pricing Tactics - Some business create products in large quantities thus reducing there overall costs and allowing them to sell the products at a predatory pricing level meaning that any new entrants to the market would not be able to compete with there low prices. ...read more.

Middle

Whereas long run is "a period of time in which all variables are able to settle at their equilibrium" Dictionary of economics, Page 232 How do barriers to entry affect the retention of super-normal profit in the long run? Different barriers to entry affect the retention, or the ability to sustain a constant flow of super-normal profit in the long run in a number of ways; When there are low barriers to entry, i.e in a market of perfect competition or even monopolistic competition it is hard to continue to make a supernormal profit in any other time period other than the immediate short term. This is more likely to occur the further away from perfect competition we go, with monopolies most likely to be gaining super-normal profits. Theoretically, if we take a market where perfect competition exists, (for example using jeans), and for the purpose of this example let's say all the sellers in this market manufacture blue denim jeans. If one company has an innovative idea and begins selling black jeans which are popular with the consumers, then this company will begin to make super-normal profits as their product is being bought in preference to the other standard blue jeans. At this specific moment in time this company has the competitive advantage however due to their being low barriers to entry, and due to the fact that this is perfect competition where information is available to everyone, companies will also begin to produce black jeans, and new companies will enter the market as there are no restrictions and too begin to produce these black jeans. ...read more.

Conclusion

In my opinion perfect knowledge also has a key part in preventing super-normal profit being made in the long run as when new ideas or created, it is only a short period of time before everyone can access this knowledge and use it. I believe that in perfect competition it is this factor that has the largest impact on super-normal profits as if competitors could not access the information although companies could easily enter the market, it still would take time for them to create an equally innovative product. When barriers to entry are high, in a monopoly or oligopoly then this results in prolonged periods of supernormal profits as it is to hard for new business to enter the market and try and produce similar products or offer similar services. Here barriers to entry play a key role as they keep the market competitive by only allowing few companies to trade. I can confidently say that depending on the market then barriers to entry has a level of importance in retaining the level of supernormal profit; in a market of perfect competition then barriers to entry play a less important role as all other factors can allow companies to be able to produce similar products to the new leading ones which in turn drive down profit levels. However in markets with high barriers to entry where these characteristics are different, barriers to entry provide a wall in-between the market and new competition allowing supernormal profit to continue to be made for longer periods of time and allowing it to be retained. ?? ?? ?? ?? ...read more.

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