Barriers to entry

In theories of competition in economics, a barrier to entry, or an economic barrier to entry, is a fixed cost that must be incurred by a new entrant, regardless of production or sales activities, into a market that incumbents do not have or have not had to incur.[1][2]

Because barriers to entry protect incumbent firms and restrict competition in a market, they can contribute to distortionary prices and are therefore most important when discussing antitrust policy. Barriers to entry often cause or aid the existence of monopolies or give companies market power.

Other definitions

Various conflicting definitions of "barrier to entry" have been put forth since the 1950s, and there has been no clear consensus on which definition should be used. This has caused considerable confusion and likely flawed policy.[1][3][4]

McAfee, Mialon, and Williams list 7 common definitions in economic literature in chronological order including:[1][5]

In 1956, Joe S. Bain used the definition "an advantage of established sellers in an industry over potential entrant sellers, which is reflected in the extent to which established sellers can persistently raise their prices above competitive levels without attracting new firms to enter the industry." McAfee et al. criticized this as being tautological by putting the "consequences of the definition into the definition itself."

In 1968, George Stigler defined an entry barrier as "A cost of producing that must be borne by a firm which seeks to enter an industry but is not borne by firms already in the industry." McAfee et al. criticized the phrase "is not borne" as being confusing and incomplete by implying that only current costs need be considered.

In 1979, Franklin M. Fisher gave the definition "anything that prevents entry when entry is socially beneficial." McAfee et al. criticized this along the same lines as Bain's definition.

In 1994, Dennis Carlton and Jeffrey Perloff gave the definition, "anything that prevents an entrepreneur from instantaneously creating a new firm in a market." Carlton and Perloff then dismiss their own definition as impractical and instead use their own definition of a "long-term barrier to entry" which is defined very closely to the definition in the introduction.

Primary and ancillary barriers to entry

A primary barrier to entry is a cost that constitutes an economic barrier to entry on its own. An ancillary barrier to entry is a cost that does not constitute a barrier to entry by itself, but reinforces other barriers to entry if they are present.[1][6]

Antitrust barriers to entry

An antitrust barrier to entry is "a cost that delays entry and thereby reduces social welfare relative to immediate but equally costly entry".[1] This contrasts with the concept of economic barrier to entry defined above, as it can delay entry into a market but does not result in any cost-advantage to incumbents in the market. All economic barriers to entry are antitrust barriers to entry, but the converse is not true.

Examples

The following examples fit all the common definitions of primary economic barriers to entry.

  • Distributor agreements - Exclusive agreements with key distributors or retailers can make it difficult for other manufacturers to enter the industry.
  • Intellectual property - Potential entrant requires access to equally efficient production technology as the combatant monopolist in order to freely enter a market. Patents give a firm the legal right to stop other firms producing a product for a given period of time, and so restrict entry into a market. Patents are intended to encourage invention and technological progress by guaranteeing proceeds as an incentive. Similarly, trademarks and servicemarks may represent a kind of entry barrier for a particular product or service if the market is dominated by one or a few well-known names.
  • Restrictive practices, such as air transport agreements that make it difficult for new airlines to obtain landing slots at some airports.
  • Supplier agreements - Exclusive agreements with key links in the supply chain can make it difficult for other manufacturers to enter an industry.
  • Switching barriers - At times, it may be difficult or expensive for customers to switch providers
  • Tariffs - Taxes on imports prevent foreign firms from entering into domestic markets.
  • Taxes – Smaller companies typical fund expansions out of retained profits so high tax rates hinder their growth and ability to compete with existing firms. Larger firms may be better able to avoid high taxes through either loopholes written into law favoring large companies or by using their larger tax accounting staffs to better avoid high taxes.
  • Zoning - Government allows certain economic activity in specified land areas but excludes others, allowing monopoly over the land needed.

Contentious examples

The following examples are sometimes cited as barriers to entry, but don't fit all the commonly cited definitions of a barrier to entry. Many of these fit the definition of antitrust barriers to entry or ancillary economic barriers to entry.

  • Economies of scale - Cost advantages raise the stakes in a market, which can deter and delay entrants into the market. This makes scale economies an antitrust barrier to entry, but they can also be ancillary.[1] Cost advantages can sometimes be quickly reversed by advances in technology. For example, the development of personal computers has allowed small companies to make use of database and communications technology which was once extremely expensive and only available to large corporations.
  • Network effect - When a good or service has a value that increases on average for every additional customer, this exerts a similar antitrust and ancillary barrier to that of economies of scale.[1]
  • Government regulations - A rule of order having the force of law, prescribed by a superior or competent authority, relating to the actions of those under the authority's control. Requirements for licenses and permits may raise the investment needed to enter a market, creating an antitrust barrier to entry.
  • Advertising - Incumbent firms can seek to make it difficult for new competitors by spending heavily on advertising that new firms would find more difficult to afford or unable to staff and or undertake. This is known as the market power theory of advertising.[7] Here, established firms' use of advertising creates a consumer perceived difference in its brand from other brands to a degree that consumers see its brand as a slightly different product.[7] Since the brand is seen as a slightly different product, products from existing or potential competitors cannot be perfectly substituted in place of the established firm's brand.[7] This makes it hard for new competitors to gain consumer acceptance.[7]
  • Capital - Any investment into equipment, building, and raw materials are ancillary barriers, especially including sunk costs.[1]
  • Uncertainty - When a market actor has various options with overlapping possible profits, choosing any one of them has an opportunity cost. This cost might be reduced by waiting until conditions are clearer, which can result in an ancillary antitrust barrier.
  • Cost advantages independent of scale - Proprietary technology, know-how, favorable access to raw materials, favorable geographic locations, learning curve cost advantages.
  • Vertical integration - A firm's coverage of more than one level of production, while pursuing practices which favor its own operations at each level, is often cited as an entry barrier as it requires competitors producing it at different steps to enter the market at once.
  • Research and development - Some products, such as microprocessors, require a large upfront investment in technology which will deter potential entrants.
  • Customer loyalty - Large incumbent firms may have existing customers loyal to established products. The presence of established strong brands within a market can be a barrier to entry in this case.
  • Control of resources - If a single firm has control of a resource essential for a certain industry, then other firms are unable to compete in the industry.
  • Inelastic demand - One strategy to penetrate a market is to sell at a lower price than the incumbents. This is ineffective with price-insensitive consumers.
  • Predatory pricing - The practice of a dominant firm selling at a loss to make competition more difficult for new firms that cannot suffer such losses, as a large dominant firm with large lines of credit or cash reserves can. It is illegal in most places; however, it is difficult to prove. See antitrust. In the context of international trade, such practices are often called dumping.
  • Occupational licensing - Examples include educational, licensing, and quota limits on the number of people who can enter a certain profession.

Classification and examples

Michael Porter classifies the markets into four general cases:

These markets combine the attributes:

  • Markets with high entry barriers have few players and thus high profit margins.
  • Markets with low entry barriers have lots of players and thus low profit margins.
  • Markets with high exit barriers are unstable and not self-regulated, so the profit margins fluctuate very much over time.
  • Markets with a low exit barrier are stable and self-regulated, so the profit margins do not fluctuate much over time.

The higher the barriers to entry and exit, the more prone a market tends to be a natural monopoly. The reverse is also true. The lower the barriers, the more likely the market will become perfect competition.

Market structure

  1. Perfect competition: Zero barriers to entry.
  2. Monopolistic competition: Medium barriers to entry.
  3. Oligopoly: High barriers to entry.
  4. Monopoly: Very High to Absolute barriers to entry.

See also

References

  1. ^ a b c d e f g h "When Are Sunk Costs Barriers to Entry?" (PDF). caltech.edu. Archived (PDF) from the original on 27 March 2016. Retrieved 3 May 2018.
  2. ^ "Antitrust Aspects of Barriers to Entry" (PDF). micronomics.com. Archived (PDF) from the original on 17 May 2017. Retrieved 3 May 2018.
  3. ^ "Competition and Barriers to Entry" (PDF). oecd.org. Archived (PDF) from the original on 29 August 2017. Retrieved 3 May 2018.
  4. ^ "Entry Barriers and Contemporary Antitrust Litigation". Archived from the original on 2016-03-29.
  5. ^ "Archived copy" (PDF). Archived (PDF) from the original on 2009-05-21. Retrieved 2009-12-16.CS1 maint: Archived copy as title (link)
  6. ^ "Homepage of Oz Shy" (PDF). ozshy.com. Archived (PDF) from the original on 21 December 2016. Retrieved 3 May 2018.
  7. ^ a b c d Moffatt, Mike. (2008) About.com The Market Power Theory of Advertising Archived 2008-04-05 at the Wayback Machine. Economics Glossary - Terms Beginning with M. Accessed June 19, 2008.
Contestable market

In economics, the theory of contestable markets, associated primarily with its 1982 proponent William J. Baumol, holds that there are markets served by a small number of firms that are nevertheless characterized by competitive equilibria (and therefore desirable welfare outcomes) because of the existence of potential short-term entrants.A perfectly contestable market has three main features:

No entry or exit barriers

No sunk costs

Access to the same level of technology (to incumbent firms and new entrants)A perfectly contestable market is not possible in real life. Instead, the degree of contestability of a market is talked about. The more contestable a market is, the closer it will be to a perfectly contestable market.

Economists argue that determining price and output is actually dependent not on the type of market structure (whether it is a monopoly or perfectly competitive market) but on the threat of competition.

Thus, for example, a monopoly protected by high barriers to entry (for example, it owns all the strategic resources) will make supernormal or abnormal profits with no fear of competition. However, in the same case, if it did not own the strategic resources for production, other firms could easily enter the market, which would lead to higher competition and thus lower prices. That would make the market more contestable.

Sunk costs are those costs that cannot be recovered after a firm shuts down. For example, if a new firm enters the steel industry, the entrant needs to buy new machinery. If, for any reason, the new firm could not cope up with the competition of the incumbent firm, it will plan to move out of the market. However, if the new firm cannot use or transfer the new machines that it bought for the production of steel to other uses in another industry, the fixed costs on machinery become sunk costs so if there are sunk costs in the market, they impede the first assumption of no exit barriers. That market will not be contestable, and no firms would enter the steel industry.

It is very important for firms to have access to the same level of technology as that helps determine the average cost of the product. An incumbent firm having more knowledge and access to a technology for the production of a commodity could enjoy higher economies of scale in the form of lower average cost of production. A new firm entering the market, with insufficient information or technology, could incur a higher average cost of production and so be unable to compete with the incumbent firm. That would lead to the incumbent firm enjoying monopoly power and supernormal profit in the market, as the new firm will exit the market. A solution to the problem could be governments providing equal access to knowledge and technology, as well as financial resources for the same.Its fundamental features are low barriers to entry and exit; in theory, a perfectly contestable market would have no barriers to entry or exit ("frictionless reversible entry" in economist William Brock's terms). Contestable markets are characterized by "hit and run" competition; if a firm in a contestable market raises its prices much beyond the average price level of the market, and thus begins to earn excess profits, potential rivals will enter the market, hoping to exploit the price level for easy profit. When the original incumbent firm(s) respond by returning prices to levels consistent with normal profits, the new firms will exit. Because of that, even a single-firm market can show highly competitive behavior.The applicability of the theory to real-world situations may be questioned, however, particularly as there are very few markets which are completely free of sunk costs and entry and exit barriers. Low-cost airlines remain a commonly referenced example of a contestable market; entrants have the possibility of leasing aircraft and should be able to respond to high profits by quickly entering and exiting. However, it is now generally admitted that Baumol's judgment that the US airline industry was therefore best left deregulated was incorrect since the now duly deregulated industry is "well on its way" to evolving into a concentrated oligopoly. More generally, experimental evidence collected since the publication of Baumol's paper has suggested that perfectly competitive markets would, if they existed, behave in the way Baumol outlined, the performance of imperfectly contestable markets (i.e. real-world markets) depends "on actual rather than potential competition" perhaps in part due to the range of "strategic responses" available to incumbents that were not considered by Baumol as part of his theory.The theory of contestable markets has been used to argue for weaker application of antitrust laws, as simply observing a monopoly market may not prove that a firm is exploiting its market power to control the price level. Baumol himself argued based on the theory for both deregulation in certain industries and for more regulation in others.

Deskilling

Deskilling is the process by which skilled labor within an industry or economy is eliminated by the introduction of technologies operated by semiskilled or unskilled workers. This results in cost savings due to lower investment in human capital, and reduces barriers to entry, weakening the bargaining power of the human capital.

Deskilling is the decline in working positions through the machinery introduced to separate workers from the production process.

Deskilling can also refer to individual workers specifically. The term refers to a person becoming less proficient over time. Examples of how this can occur include changes in one's job definition, moving to a completely different field, chronic underemployment (e.g. working as cashier instead of accountant), and being out of the workforce for extended periods of time (e.g. quitting a position in order to focus exclusively on child-rearing).It is criticized for decreasing quality, demeaning labor (rendering work mechanical, rather than thoughtful and making workers automatons rather than artisans), and undermining community.

Free entry

In economics, free entry is a condition in which firms can freely enter the market for an economic good by establishing production and beginning to sell the product. In most markets this condition is present only in the long run.

Free entry is part of the perfect competition assumption that there are an unlimited number of buyers and sellers in a market. In conditions in which there is not a natural monopoly caused by unlimited economies of scale, free entry prevents any existing firm from maintaining a monopoly, which would restrict output and charge a higher price than a multi-firm market would.

Free entry is usually accompanied by free exit, under which condition firms that are incurring losses (such as would happen if there are too many firms producing the product so that each is producing too little to be at its minimum efficient scale) can readily leave the market. However, exiting a market may involve abandonment costs.

Gold rush

A gold rush is a new discovery of gold—sometimes accompanied by other precious metals and rare earth minerals—that brings an onrush of miners seeking their fortune. Major gold rushes took place in the 19th century in Australia, New Zealand, Brazil, Canada, South Africa and the United States, while smaller gold rushes took place elsewhere.

The wealth that resulted was distributed widely because of reduced migration costs and low barriers to entry. While gold mining itself was unprofitable for most diggers and mine owners, some people made large fortunes, and the merchants and transportation facilities made large profits. The resulting increase in the world's gold supply stimulated global trade and investment. Historians have written extensively about the migration, trade, colonization and environmental history associated with gold rushes.Gold rushes were typically marked by a general buoyant feeling of a "free for all" in income mobility, in which any single individual might become abundantly wealthy almost instantly, as expressed in the California Dream.

Gold rushes helped spur a huge immigration that often led to permanent settlement of new regions. Activities propelled by gold rushes define significant aspects of the culture of the Australian and North American frontiers. At a time when the world's money supply was based on gold, the newly mined gold provided economic stimulus far beyond the gold fields.

Gold rushes extend as far back to the Roman Empire, whose gold mining was described by Diodorus Siculus and Pliny the Elder, and probably further back to ancient Egypt.

Health economics

Health economics is a branch of economics concerned with issues related to efficiency, effectiveness, value and behavior in the production and consumption of health and healthcare. In broad terms, health economists study the functioning of healthcare systems and health-affecting behaviors such as smoking.

A seminal 1963 article by Kenneth Arrow, often credited with giving rise to health economics as a discipline, drew conceptual distinctions between health and other goods.

Factors that distinguish health economics from other areas include extensive government intervention, intractable uncertainty in several dimensions, asymmetric information, barriers to entry, externalities and the presence of a third-party agent. In healthcare, the third-party agent is the physician, who makes purchasing decisions (e.g., whether to order a lab test, prescribe a medication, perform a surgery, etc.) while being insulated from the price of the product or service.

Health economists evaluate multiple types of financial information: costs, charges and expenditures.

Uncertainty is intrinsic to health, both in patient outcomes and financial concerns. The knowledge gap that exists between a physician and a patient creates a situation of distinct advantage for the physician, which is called asymmetric information.

Externalities arise frequently when considering health and health care, notably in the context of infectious disease. For example, making an effort to avoid catching the common cold affects people other than the decision maker.

Industrial organization

In economics, industrial organization or industrial economy is a field that builds on the theory of the firm by examining the structure of (and, therefore, the boundaries between) firms and markets. Industrial organization adds real-world complications to the perfectly competitive model, complications such as transaction costs, limited information, and barriers to entry of new firms that may be associated with imperfect competition. It analyzes determinants of firm and market organization and behavior as between competition and monopoly, including from government actions.

There are different approaches to the subject. One approach is descriptive in providing an overview of industrial organization, such as measures of competition and the size-concentration of firms in an industry. A second approach uses microeconomic models to explain internal firm organization and market strategy, which includes internal research and development along with issues of internal reorganization and renewal. A third aspect is oriented to public policy as to economic regulation, antitrust law, and, more generally, the economic governance of law in defining property rights, enforcing contracts, and providing organizational infrastructure.The extensive use of game theory in industrial economics has led to the export of this tool to other branches of microeconomics, such as behavioral economics and corporate finance. Industrial organization has also had significant practical impacts on antitrust law and competition policy.The development of industrial organization as a separate field owes much to Edward Chamberlin, Joan Robinson, Edward S. Mason, J. M. Clark, Joe S. Bain and Paolo Sylos Labini, among others.

Interactive novel

The interactive novel is a form of interactive web fiction. In an interactive novel, the reader chooses where to go next in the novel by clicking on a piece of hyperlinked text, such as a page number, a character, or a direction. While authors of traditional paper-and-ink novels have sometimes tried to give readers the random directionality offered by hypertexting, this approach was not completely feasible until the development of HTML. For a discussion of paper novels that use a branching structure, such as Choose Your Own Adventure novels, see the Wikipedia entry on gamebooks.

By following hyperlinked phrases within an interactive novel, readers can find new ways to understand characters. There is no wrong way to read a hypertext interactive novel. Links embedded within the pages are meant to be taken at a reader's discretion – to allow the reader a choice in the novel's world.

A typical example of this genre is The Interactive Novel: Pick a character, pick a direction, found on David Benson's "No Dead Trees" website. This fiction allows readers, who can also become writers, to explore the novel from a list of characters given at the site. The novel is intended to be read randomly, as the reader chooses to follow various directions.

Another example of an interactive novel would be Pottermore, which is J. K. Rowling's extended version of the series Harry Potter, which can be found online. This offers the reader a different experience into the Harry Potter world and enables them to find out further information on the Harry Potter series. The reader can find different ways that they can discover different sections of the novels through browsing and collecting items, which allows the reader to go further through Pottermore.

The genre has prompted some less than respectful responses, including a comment by John Updike, who participated in an early effort at online fiction, that "books haven't really been totally ousted yet". Other critics, while conceding the hyped and trendy nature of the genre, have found real value in the immersive if sometimes disorienting nature of interactive fiction.There are many interactive novels on the Web. Some of the older efforts have fallen into disuse, but the ease of creating such fiction, with the lack of the barriers to entry typical of traditional paper-and-ink publishing, helps to keep the genre alive with new works.

Market power

In economics and particularly in industrial organization, market power is the ability of a firm to profitably raise the market price of a good or service over marginal cost. In perfectly competitive markets, market participants have no market power. A firm with total market power can raise prices without losing any customers to competitors. Market participants that have market power are therefore sometimes referred to as "price makers" or "price setters", while those without are sometimes called "price takers". Significant market power occurs when prices exceed marginal cost and long run average cost, so the firm makes profit.

A firm with market power has the ability to individually affect either the total quantity or the prevailing price in the market. Price makers face a downward-sloping demand curve, such that price increases lead to a lower quantity demanded. The decrease in supply as a result of the exercise of market power creates an economic deadweight loss which is often viewed as socially undesirable. As a result, many countries have anti-trust or other legislation intended to limit the ability of firms to accrue market power. Such legislation often regulates mergers and sometimes introduces a judicial power to compel divestiture.

A firm usually has market power by virtue of controlling a large portion of the market. In extreme cases—monopoly and monopsony—the firm controls the entire market. However, market size alone is not the only indicator of market power. Highly concentrated markets may be contestable if there are no barriers to entry or exit, limiting the incumbent firm's ability to raise its price above competitive levels.

Market power gives firms the ability to engage in unilateral anti-competitive behavior. Some of the behaviours that firms with market power are accused of engaging in include predatory pricing, product tying, and creation of overcapacity or other barriers to entry. If no individual participant in the market has significant market power, then anti-competitive behavior can take place only through collusion, or the exercise of a group of participants' collective market power.

The Lerner index and Herfindahl index may be used to measure market power.

Monopolistic competition

Monopolistic competition is a type of imperfect competition such that many producers sell products that are differentiated from one another (e.g. by branding or quality) and hence are not perfect substitutes. In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firms. In the presence of coercive government, monopolistic competition will fall into government-granted monopoly. Unlike perfect competition, the firm maintains spare capacity. Models of monopolistic competition are often used to model industries. Textbook examples of industries with market structures similar to monopolistic competition include restaurants, cereal, clothing, shoes, and service industries in large cities. The "founding father" of the theory of monopolistic competition is Edward Hastings Chamberlin, who wrote a pioneering book on the subject, Theory of Monopolistic Competition (1933). Joan Robinson published a book The Economics of Imperfect Competition with a comparable theme of distinguishing perfect from imperfect competition.

Monopolistically competitive markets have the following characteristics:

There are many producers and many consumers in the market, and no business has total control over the market price.Consumers perceive that there are non-price differences among the competitors' products.There are few barriers to entry and exit.Producers have a degree of control over price.The long-run characteristics of a monopolistically competitive market are almost the same as a perfectly competitive market. Two differences between the two are that monopolistic competition produces heterogeneous products and that monopolistic competition involves a great deal of non-price competition, which is based on subtle product differentiation. A firm making profits in the short run will nonetheless only break even in the long run because demand will decrease and average total cost will increase. This means in the long run, a monopolistically competitive firm will make zero economic profit. This illustrates the amount of influence the firm has over the market; because of brand loyalty, it can raise its prices without losing all of its customers. This means that an individual firm's demand curve is downward sloping, in contrast to perfect competition, which has a perfectly elastic demand schedule.

Monopoly

A monopoly (from Greek μόνος mónos ["alone" or "single"] and πωλεῖν pōleîn ["to sell"]) exists when a specific person or enterprise is the only supplier of a particular commodity. This contrasts with a monopsony which relates to a single entity's control of a market to purchase a good or service, and with oligopoly which consists of a few sellers dominating a market. Monopolies are thus characterized by a lack of economic competition to produce the good or service, a lack of viable substitute goods, and the possibility of a high monopoly price well above the seller's marginal cost that leads to a high monopoly profit. The verb monopolise or monopolize refers to the process by which a company gains the ability to raise prices or exclude competitors. In economics, a monopoly is a single seller. In law, a monopoly is a business entity that has significant market power, that is, the power to charge overly high prices. Although monopolies may be big businesses, size is not a characteristic of a monopoly. A small business may still have the power to raise prices in a small industry (or market).A monopoly is distinguished from a monopsony, in which there is only one buyer of a product or service; a monopoly may also have monopsony control of a sector of a market. Likewise, a monopoly should be distinguished from a cartel (a form of oligopoly), in which several providers act together to coordinate services, prices or sale of goods. Monopolies, monopsonies and oligopolies are all situations in which one or a few entities have market power and therefore interact with their customers (monopoly or oligopoly), or suppliers (monopsony) in ways that distort the market.Monopolies can be established by a government, form naturally, or form by integration.

In many jurisdictions, competition laws restrict monopolies. Holding a dominant position or a monopoly in a market is often not illegal in itself, however certain categories of behavior can be considered abusive and therefore incur legal sanctions when business is dominant. A government-granted monopoly or legal monopoly, by contrast, is sanctioned by the state, often to provide an incentive to invest in a risky venture or enrich a domestic interest group. Patents, copyrights, and trademarks are sometimes used as examples of government-granted monopolies. The government may also reserve the venture for itself, thus forming a government monopoly.Monopolies may be naturally occurring due to limited competition because the industry is resource intensive and requires substantial costs to operate.

Monopoly profit

In economics a monopoly is a firm that lacks any viable competition, and is the sole producer of the industry's product. In a normal competitive situation, no firm can charge a price that is significantly higher than the Marginal (Economic) cost of producing (the last unit of) the product. If any firm doing business within a competitive situation tries to raise prices significantly higher than the Marginal cost of producing the product, it will lose all of its customers to either other existing firms that charge lower prices, or to a new firm that will find it profitable to use a lower price (closer to its marginal cost) to take customers away from the firm charging the higher price. But since the monopoly firm does not have to worry about losing customers to competitors, it can set a Monopoly price that is significantly higher than its marginal cost, allowing it to have an economic profit that is significantly higher than the normal profit that is typically found in a perfectly competitive industry. The high economic profit obtained by a monopoly firm is referred to as monopoly profit.

The existence of a monopoly, and therefore the existence of a monopoly price and monopoly profit, depend on the existence of barriers to entry: these stop other firms from entering into the industry and sapping away profits.

Natural monopoly

A natural monopoly is a monopoly in an industry in which high infrastructural costs and other barriers to entry relative to the size of the market give the largest supplier in an industry, often the first supplier in a market, an overwhelming advantage over potential competitors. This frequently occurs in industries where capital costs predominate, creating economies of scale that are large in relation to the size of the market; examples include public utilities such as water services and electricity. Natural monopolies were discussed as a potential source of market failure by John Stuart Mill, who advocated government regulation to make them serve the public good.

Open education

Open education is education without academic admission requirements and is typically offered online. Open education broadens access to the learning and training traditionally offered through formal education systems. The qualifier "open" refers to the elimination of barriers that can preclude both opportunities and recognition for participation in institution-based learning. One aspect of openness or "opening up" education is the development and adoption of open educational resources.

Institutional practices that seek to eliminate barriers to entry, for example, would not have academic admission requirements. Such universities include the Open University in Britain, and Athabasca University, Thompson Rivers University, Open Learning in Canada. Such programs are commonly (but not necessarily) distance learning programs like e-learning, MOOC and OpenCourseWare. Whereas many e-learning programs are free to follow, the costs of acquiring a certification may be a barrier. Many open education institutes offer free certification schemes accredited by organisations like UKAS in the UK and ANAB in the United States; others offer a badge.

Perfect competition

In economics, specifically general equilibrium theory, a perfect market is defined by several idealizing conditions, collectively called perfect competition. In theoretical models where conditions of perfect competition hold, it has been theoretically demonstrated that a market will reach an equilibrium in which the quantity supplied for every product or service, including labor, equals the quantity demanded at the current price. This equilibrium will be a Pareto optimum, meaning that nobody can be made better off by exchange without making someone else worse off.Perfect competition provides both allocative efficiency and productive efficiency:

Such markets are allocatively efficient, as output will always occur where marginal cost is equal to average revenue i.e. price (MC = AR). In perfect competition, any profit-maximizing producer faces a market price equal to its marginal cost (P = MC). This implies that a factor's price equals the factor's marginal revenue product. It allows for derivation of the supply curve on which the neoclassical approach is based. This is also the reason why "a monopoly does not have a supply curve". The abandonment of price taking creates considerable difficulties for the demonstration of a general equilibrium except under other, very specific conditions such as that of monopolistic competition.

In the short-run, perfectly competitive markets are not necessarily productively efficient as output will not always occur where marginal cost is equal to average cost (MC = AC). However, in long-run, productive efficiency occurs as new firms enter the industry. Competition reduces price and cost to the minimum of the long run average costs. At this point, price equals both the marginal cost and the average total cost for each good (P = MC = AC).The theory of perfect competition has its roots in late-19th century economic thought. Léon Walras gave the first rigorous definition of perfect competition and derived some of its main results. In the 1950s, the theory was further formalized by Kenneth Arrow and Gérard Debreu. Real markets are never perfect. Those economists who believe in perfect competition as a useful approximation to real markets may classify those as ranging from close-to-perfect to very imperfect. Share and foreign exchange markets are commonly said to be the most similar to the perfect market. The real estate market is an example of a very imperfect market. In such markets, the theory of the second best proves that if one optimality condition in an economic model cannot be satisfied, it is possible that the next-best solution involves changing other variables away from the values that would otherwise be optimal.

Porter's five forces analysis

Porter's Five Forces Framework is a tool for analyzing competition of a business. It draws from industrial organization (IO) economics to derive five forces that determine the competitive intensity and, therefore, the attractiveness (or lack of it) of an industry in terms of its profitability. An "unattractive" industry is one in which the effect of these five forces reduces overall profitability. The most unattractive industry would be one approaching "pure competition", in which available profits for all firms are driven to normal profit levels. The five-forces perspective is associated with its originator, Michael E. Porter of Harvard University. This framework was first published in Harvard Business Review in 1979.Porter refers to these forces as the microenvironment, to contrast it with the more general term macroenvironment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally requires a business unit to re-assess the marketplace given the overall change in industry information. The overall industry attractiveness does not imply that every firm in the industry will return the same profitability. Firms are able to apply their core competencies, business model or network to achieve a profit above the industry average. A clear example of this is the airline industry. As an industry, profitability is low because the industry's underlying structure of high fixed costs and low variable costs afford enormous latitude in the price of airline travel. Airlines tend to compete on cost, and that drives down the profitability of individual carriers as well as the industry itself because it simplifies the decision by a customer to buy or not buy a ticket. A few carriers--Richard Branson's Virgin Atlantic is one--have tried, with limited success, to use sources of differentiation in order to increase profitability.

Porter's five forces include three forces from 'horizontal' competition--the threat of substitute products or services, the threat of established rivals, and the threat of new entrants--and two others from 'vertical' competition--the bargaining power of suppliers and the bargaining power of customers.

Porter developed his five forces framework in reaction to the then-popular SWOT analysis, which he found both lacking in rigor and ad hoc. Porter's five-forces framework is based on the structure–conduct–performance paradigm in industrial organizational economics. It has been applied to try to address a diverse range of problems, from helping businesses become more profitable to helping governments stabilize industries. Other Porter strategy tools include the value chain and generic competitive strategies.

Predatory pricing

Predatory pricing, also known as undercutting, is a pricing strategy in which a product or service is set at a very low price with the intention to achieve new customers (Loss leader), or driving competitors out of the market or to create barriers to entry for potential new competitors.

Theoretically, if competitors or potential competitors cannot sustain equal or lower prices without losing money, they go out of business or choose not to enter the business. The so-called predatory merchant then theoretically has fewer competitors or even is a de facto monopoly.

Predatory pricing is considered anti-competitive in many jurisdictions and is illegal under some competition laws. However, it can be difficult to prove that prices dropped because of deliberate predatory pricing, rather than legitimate price competition. In any case, competitors may be driven out of the market before the case is ever heard.

Profit (economics)

In economics, profit in the accounting sense of the excess of revenue over cost is the sum of two components: normal profit and economic profit. Normal profit is the profit that is necessary to just cover the opportunity costs of the owner-manager or of the firm's investors. In the absence of this much profit, these parties would withdraw their time and funds from the firm and use them to better advantage elsewhere. In contrast, economic profit, sometimes called excess profit, is profit in excess of what is required to cover the opportunity costs.

The enterprise component of normal profit is the profit that a business owner considers necessary to make running the business worth his or her while, i.e., it is comparable to the next-best amount the entrepreneur could earn doing another job. Particularly if enterprise is not included as a factor of production, it can also be viewed as a return to capital for investors including the entrepreneur, equivalent to the return the capital owner could have expected (in a safe investment), plus compensation for risk. Normal profit varies both within and across industries; it is commensurate with the riskiness associated with each type of investment, as per the risk-return spectrum.

Only normal profits arise in circumstances of perfect competition when long-run economic equilibrium is reached; there is no incentive for firms to either enter or leave the industry.

Quasi-rent

Quasirent is a term in economics that describes temporary rent like returns to a supplier/owner.

Quasi-rent differs from pure economic rent in that it is a temporary phenomenon. It can arise from the barriers to entry that potential competitors face in the short run, such as the granting of patents or other legal protections for intellectual property by governments. It can also arise due to entrepreneurial address of market fluctuation, or it can arise due to the lack of real capital to meet near term demand increases. In the longer term the opportunity to profit will bring new capital into existence and the quasi rent will be competed away.In Industrial Organizations field, Williamson points "The joining of opportunism with transaction-specific investments (or what Klein, Crawford, and Alchian refer to as "appropriable quasi rents") is a leading factor in explaining decisions to vertically integrate."Alfred Marshall (1842-1924) was the first to observe quasi-rents.

Note on quasi-rent -

this concept was put forward by Alfred Marshall. Quasi-rent refers to that additional income which is similar to rent. According to Ricardo, rent arises on account of fixed supply of land. But there are other factors which are found in fixed supply in the short term. The additional income earned by these factors in the short-period is similar to rent.

Starving artist

A starving artist is an artist who sacrifices material well-being in order to focus on their artwork. They typically live on minimum expenses, either for a lack of business or because all their disposable income goes toward art projects. Related terms include starving actor and starving musician.

Some starving artists desire mainstream success but have difficulty due to high barriers to entry in fields such as the visual arts, the film industry, and theatre. These artists frequently take temporary positions such as waitering or other service industry jobs while they focus their attention on "breaking through" in their preferred field. The Starving Artists Project describes these artists as those who have not yet broken into their careers.

Other artists may find enough satisfaction in living as artists to choose voluntary poverty regardless of their prospects for future financial reward or broad recognition. Virginia Nicholson writes in Among the Bohemians: Experiments in Living 1900–1939:

Fifty years on we may judge that Dylan Thomas's poverty was noble, while Nina Hamnett's was senseless. But a minor artist with no money goes as hungry as a genius. What drove them to do it? I believe that such people were not only choosing art, they were choosing the life of the artist. Art offered them a different way of living, one that they believed more than compensated for the loss of comfort and respectability.

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