Cambridge International as and a level Economics Ebook

Figure 7.17 
Monopolistic competition in the short and the long run
Take-away food outlets in Islamabad (top) and Bradford (below)
166
Cambridge International A Level Economics

---

the risk of their market share or price being challenged 
from outside. Th
e construction and maintenance of these 
barriers can become part of the fi rm’s behaviour. Below 
are some of the main barriers:
■
In some countries, it may be impossible for new firms to 
enter an industry because the economic activity is state-
owned or the good is produced under licence from the 
government. This is a legal monopoly usually created 
to achieve social and political objectives. The economic 
justification might lie in the concept of a 
natural monopoly
, 
where it is more eff icient to have a single producer than to 
have competing firms, for example in the case of railways. 
Alternatively, in countries where the former state-owned 
resources have been privatised and the market has been 
deregulated, the economic justification is that the injection 
of competition will bring additional economic and social 
benefits through a more eff icient allocation of resources.
■ 
The high fixed cost or setup cost in activities such as 
electricity generation, aircraft and car production and 
pharmaceuticals may deter potential entrants. The barrier 
here is access to capital. Only very large firms will be able to 
fund the necessary investment. Research and development 
costs will represent a high proportion of total costs and it 
will require high sales over a long period of time before the 
activity becomes profitable.
■ 
If a firm is shutting down and some costs such as research and 
development costs cannot be recovered. The resources are 
specialised and are not easily transferrable to other uses. They 
are regarded as sunk costs and act as a 
barrier to exit
from 
the industry because the capital investment will be lost. It is 
therefore the risk of entering and the high cost of failure that 
deters potential entrants and so acts as a barrier to entry.
■ 
Advertising and brand names with a high degree of 
consumer loyalty may prove a diff icult obstacle to 
overcome. This explains why firms regard their expenditure 
on advertising and promotion as a type of investment. 
Existing firms can make entry more diff icult through brand 
proliferation, giving consumers an apparent abundance of 
choice and closing market niches. Successful advertising 
can not only shift a firm’s demand curve to the right 
but it can also reduce its price elasticity of demand.