ESTABLISHING A NEW FIRM
By Wilson Wu
Barriers to entry are obstacles that have to be overcome in order for a new firm to be established in a market. Such barriers include technology, capital investment, brand loyalty, economies of scale in the long run, government intervention and so on.
Within the monopolistic competitive market of H&M, the barrier to enter into or exit out of the market is low. According to Michael Porter, H&M is considered to be in a market with low barrier to entry and low exit barrier as are all other retailers.
For a firm to establish its dominance in a market, they must offer product differentiation – providing the same goods or services but with unique characteristics to attract consumers. This allows an adjustment in price as long as it justifies the ‘uniqueness’ of the goods or services. However, being a firm in a monopolistic competitive market, they have limited control over pricing. Offering same goods or services in the same market with no product differentiation would give no incentive for existing consumers in the market to switch brands.
Barriers to entry are obstacles that have to be overcome in order for a new firm to be established in a market. Such barriers include technology, capital investment, brand loyalty, economies of scale in the long run, government intervention and so on.
Within the monopolistic competitive market of H&M, the barrier to enter into or exit out of the market is low. According to Michael Porter, H&M is considered to be in a market with low barrier to entry and low exit barrier as are all other retailers.
Within the monopolistic competitive market of H&M, the barrier to enter into or exit out of the market is low. According to Michael Porter, H&M is considered to be in a market with low barrier to entry and low exit barrier as are all other retailers.
For a firm to establish its dominance in a market, they must offer product differentiation – providing the same goods or services but with unique characteristics to attract consumers. This allows an adjustment in price as long as it justifies the ‘uniqueness’ of the goods or services. However, being a firm in a monopolistic competitive market, they have limited control over pricing. Offering same goods or services in the same market with no product differentiation would give no incentive for existing consumers in the market to switch brands.
Barriers to entry are obstacles that have to be overcome in order for a new firm to be established in a market. Such barriers include technology, capital investment, brand loyalty, economies of scale in the long run, government intervention and so on.
Within the monopolistic competitive market of H&M, the barrier to enter into or exit out of the market is low. According to Michael Porter, H&M is considered to be in a market with low barrier to entry and low exit barrier as are all other retailers.
For a firm to establish its dominance in a market, they must offer product differentiation – providing the same goods or services but with unique characteristics to attract consumers. This allows an adjustment in price as long as it justifies the ‘uniqueness’ of the goods or services. However, being a firm in a monopolistic competitive market, they have limited control over pricing. Offering same goods or services in the same market with no product differentiation would give no incentive for existing consumers in the market to switch brands.
As more firms are introduced into the market, the demand curve for all firms would shift left/inwards; this is due to the extra supply offered by new producers (as shown in Figure 1) |
It would be possible to establish a new firm providing the same goods or services in the same market, as not many barriers to entry and exit are present in the industry. As long as the entrepreneur has the capabilities of satisfying the needs of capital knowledge and motivation to start a company, they can do so with little resistance. However, being a market saturated with many existing companies, they must offer differentiation to attract customers or lower the price. This can be done by altering the non-price factors of products, including packaging, design, and colour. A new firm would most probably not have the ability to lower price unless the capital invested is large enough to cover a certain amount of deficit during the preliminary stages of establishing the firm.
It is quite easy to picture this; imagine being a passionate entrepreneur with tremendous interest in clothes and you try to establish your own clothing brand in the market. Due to all of the existing brands, you would have difficulties in convincing consumers that your clothes are better, and so you add unique characteristics to your own clothes, such as fashionably placed cut holes or patterns. Then you realise by doing so, you gained a fair share of the market and so you proceed to repeat the cycle over and over again in search of revenue. After this, due to the extra expendable money, you can raise the barrier to entry for new firms by decreasing the price to just below AC so that they wouldn’t enter the market (as shown in Figure 2).
It is quite easy to picture this; imagine being a passionate entrepreneur with tremendous interest in clothes and you try to establish your own clothing brand in the market. Due to all of the existing brands, you would have difficulties in convincing consumers that your clothes are better, and so you add unique characteristics to your own clothes, such as fashionably placed cut holes or patterns. Then you realise by doing so, you gained a fair share of the market and so you proceed to repeat the cycle over and over again in search of revenue. After this, due to the extra expendable money, you can raise the barrier to entry for new firms by decreasing the price to just below AC so that they wouldn’t enter the market (as shown in Figure 2).
As demonstrated, it is highly dependable on the market situation as to whether if it is possible to enter the market providing the same goods or services. The amount of expendable resources (capital, technology etc…) at the initial stages of a firm startup determines the success of the firm.