In perfect competition and monopolistic competition, where there are many small firms, firms are able to enter or leave the market freely. This means that the existing firms do not have the ability to stop new firms from entering or leaving the market if they so desire. In the case where the existing firms are making abnormal profits, the positive economic profit arising when AR > AC, new firms are attracted into the industry because of the absence of entry barriers and by the opportunity to make abnormal profits. As more and more firms enter the industry, the supply curve for the product will start to shift to the right (because more firms begin to supply the same product). This would decrease the price of the product thus shifting the demand curve downward in PC and leftward in MC. Because there are no barriers protecting incumbent firms and restricting competition, there is high level of competition in the industry since firms have to compete against each other to sell identical (in PC) or slightly differentiated products (in MC). As the industry is dominated by many small firms, individual firms have no market power and are called “price takers” meaning that they have to sell their products at the going market price.
In oligopoly and monopoly, on the other hand, there is existence of significant barriers to entry. This allows firms in both market structures to have monopoly power and have the ability to control the price of the product. Because new firms cannot enter or leave the industry freely, new firms cannot compete away the abnormal profits that the existing firms are making in both the short run, the period of time in which at least one factor of production is fixed, and the long run, the period of time in which all factors of production are variable (but the state of technology is fixed). Due to these significant barriers to entry, firms in monopoly and oligopoly maintain their power and are able to restrict competition in the market. As a result, the existence of market power is aided by barriers to entry.
In conclusion, barriers to entry affect the characteristic of the market. Firms in PC and MC do not have market power and there is an existence of competition in industry whereas firms in OL and MN have monopoly power and are able to restrict competition.
