Preventing Barriers to Entry (15)

Using real-world examples, evaluate the view that governments should always try to prevent the creation of barriers to entry in a market.

Barriers to entry are obstacles that make it difficult for new firms to enter a market and compete with existing firms. These barriers can take various forms, including high start-up costs, economies of scale, and regulatory requirements. In this essay, we will evaluate the view that governments should always try to prevent the creation of barriers to entry in a market, using real-world examples to support our analysis.

One argument in favor of governments preventing barriers to entry is that it promotes competition, which can lead to increased efficiency, innovation, and lower prices for consumers. For example, in the telecommunications industry, governments can encourage competition by ensuring that new firms have access to necessary infrastructure and by preventing anti-competitive practices such as predatory pricing. By doing so, governments can help foster a more competitive market, which can result in better services and lower prices for consumers. However, in some cases, promoting competition may not always lead to the desired outcomes, particularly in industries where natural monopolies exist, and economies of scale are significant, such as utilities or public transportation.

Another argument in favor of preventing barriers to entry is that it can help prevent the formation of monopolies or oligopolies, which can lead to market power and potentially negative outcomes for consumers and society. For example, governments can enforce antitrust laws to prevent mergers or acquisitions that would result in excessive market concentration or dominance. By doing so, governments can help maintain a competitive market structure, which can, in turn, promote consumer welfare and prevent the negative effects associated with market power, such as price gouging or reduced product quality. However, it is important to consider that not all barriers to entry are necessarily harmful, and some may be necessary to ensure safety, quality, or other social objectives.

There are instances where the creation of barriers to entry may be justified or even desirable. For example, in industries where safety or quality is of paramount importance, such as pharmaceuticals or aviation, high barriers to entry can help ensure that only firms with the necessary expertise and resources can enter the market, ultimately protecting consumers and society from potential harm. In these cases, governments may need to balance the goal of promoting competition with the need to ensure safety and quality standards are met.

Finally, governments should prevent barriers to entry because these barriers can lead to allocative and productive inefficiency, as illustrated by a monopoly diagram. In a monopolistic market, where barriers to entry are high, the single firm has significant market power and can set prices above the marginal cost of production, resulting in allocative inefficiency. This is because the firm is producing a lower quantity than would be produced in a competitive market, where price equals marginal cost.

Moreover, in a monopoly, the firm may also operate at a point where it is not minimizing its average total cost, leading to productive inefficiency. This occurs because, without the competitive pressure from rival firms, the monopolist has less incentive to minimize costs and innovate. In contrast, a more competitive market, where barriers to entry are low, would encourage firms to be more efficient in their production processes to remain competitive and maintain their market share.