Monopolistic Competition Barriers to Entry

Even though several companies that produce similar goods operate under monopolistic competition and barriers to entry are relatively low compared to a monopoly, the existing market entry barriers may still prevent additional companies from joining the market.

These monopolistic competition barriers to entry range from the common ones such as the cost of raw materials or retail space to those which are difficult to surmount such as government rules and regulations.

The barriers to entry are the economic hurdles that restrict, discourage, or prevent new entrants from becoming part of the marketplace. In most instances, barriers to entry ensure that only suitable, capable, and qualified brands exist in a market.

The entry of additional producers in a competitive market usually reduces the revenue and profits that existing companies make as some consumers are bound to patronize the new entrants.

Before we discuss further about the entry barriers under monopolistic competition, let us define the term, monopolistic competition.

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What is monopolistic competition?

Monopolistic competition refers to a market structure where many competing brands offer consumers similar products or services. Despite the similarities however, the products or services are not substitutes and are often differentiated through pricing, quality, branding, and marketing.

Due to the similarities in products or services and the availability of several options, most consumers can hardly pinpoint the specific differences between them. Brands serve as price makers in this kind of market as they set the price at which they want to sell their products.

Demand in monopolistic competition is highly elastic, which means it is highly responsive to changes in price. For example, if a brand changes the price of its cookies from $5 to $8, its customers are likely to go for another cookie brand that still sells for $5

Monopolistic competition barriers to entry
Barriers to entry in a monopolistic competition

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Are there barriers to entry in monopolistic competition?

Yes. Several barriers to entry exist under monopolistic competition including artificial, governmental, legal, industrial, and natural barriers.

Governmental barriers are often applicable to every industry because all companies operating in a country must adhere to the laws, rules, and regulations that the government enacts.

Legal, artificial, and industrial barriers are often industry-specific. In contrast, natural barriers occur due to privileges and leverage enjoyed by brands either due to access to particular resources or the recognition they enjoy in the market.

Industries that are good examples of monopolistic competition include retail, hospitality, and clothing industry.

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Monopolistic competition barriers to entry

  1. Artificial
  2. Government
  3. Legal
  4. Industrial
  5. Natural

The barriers to entry in a monopolistic competition are broadly classified into five as mentioned above. Some barriers exist in almost every sector while others are industry-specific.

Artificial entry barriers

  1. Advertisement and marketing
  2. Consumer switching cost
  3. Pricing strategies
  4. Reward programs
  5. High capital requirements

Advertisement and marketing

Advertisement and marketing are some of the key methods companies use in differentiating their products in a monopolistic competition. Well-established companies usually have a large advertising and marketing budget.

This enables them to reach wider potential customers across different platforms such as email, SMS, social media, billboards, television, and newspapers.

For instance, in the fiscal year ended 2023, the beverage company, Coca-Cola spent $5.01 billion on advertising and marketing its products. This large advertising budget is another barrier for upcoming companies as they cannot compete properly since they cannot afford to spend such a large amount on advertising.

Consequently, it means that they will not be able to reach a large consumer base. This in turn implies that they will not be able to earn a considerable revenue and profit.

Thus, the cost of advertising and marketing products often serves as a barrier to entry under monopolistic competition because the higher the amount spent by existing firms the greater the deterrent to new entrants.

Consumer switching cost

Another deterrent to new brands in monopolistic competition is the consumer switching cost. This is the cost consumers will incur when they switch from one service provider to another.

It usually includes the cost of purchasing and installing new equipment as well as time spent in searching for and engaging the new service provider.

For example, when switching from one cable TV provider to another, the consumer will have to spend time deciding the new service provider to use. They will also spend money on a new dish and cable TV box aside from subscription fees.

The switching cost also includes some service downtime that will be experienced by the consumer before they successfully switch from one provider to the next. Therefore, most consumers will not be willing to patronize new companies due to these costs.

On the part of the new entrant, it may take some time, in most instances, between 3-5 years before they break even and begin to get considerable patronage. This is because most consumers will not want to take on the cost incurred due to switching from one service provider to the next.

Therefore, consumer switching costs serve as an entry barrier in a monopolistic market because most companies do not want to experience the uncertainties that will come with trying to convince consumers to patronize them despite the consumer switching costs.

Pricing strategies

The pricing strategies of existing companies are another monopolistic competition barrier to entry. This is especially prevalent when existing companies have understood how to produce a high volume of goods at minimal cost which results in lower fixed cost and consequently, lower selling price.

Furthermore, since most existing companies have been operational for some time, they mostly have already expanded and grown over time which increases their production capacity. Thus, they purchase raw materials in bulk and can get them at a cheaper rate due to economies of scale.

Due to these, the selling price of the large companies is often lower than the price a new entrant will offer consumers as they may not make profits if they decide to sell their products at the same price as the existing companies. This serves as a deterrent for new companies to enter the market.

In addition, existing companies may choose to adopt discount pricing or some other product pricing strategies to ensure that new entrants are unable to effectively compete with them when it comes to offering good value at a reduced cost.

Hence, pricing is another factor that discourages new companies from becoming part of a monopolistic competition market.

Reward programs

As a means of retaining customers and encouraging more people to patronize them consistently, some companies have a reward scheme through which they reward consumers for patronizing them. The reward scheme varies based on the company.

For instance, McDonald’s Reward is a scheme used by the company to reward customers who order food using its mobile app. Consumers get rewarded 100 points for every $1 spent on eligible items. These earned points can be used to further place orders.

Some other companies such as travel companies may offer a discounted price for repeat customers or even a free flight after a certain number of trips. Some may offer points that consumers can accumulate and redeem whenever they desire or after they have reached a specified number of points.

These reward schemes build consumer loyalty in brands and are a barrier to entry under monopolistic competition because consumers will not be willing to try new companies that may join the market.

High capital requirements

The capital needed to begin operating in some industries serves as an entry barrier for new players. For instance, the car production industry is a multi-billion dollar industry that requires huge capital investment for any company that wants to produce cars.

Additionally, the current shift from fossil fuel-powered vehicles to vehicles that are powered using renewable energy sources such as electricity and solar power further increases the cost of setting up a car manufacturing company.

Therefore, very few individuals or entities can afford to enter such industries hence the high capital requirements are a monopolistic market entry barrier.

Government barriers to entry

Government rules, regulations, or laws may also be a barrier to entry in monopolistic competition. For most government-regulated industries, the government set up such restrictions as a means of ensuring consumers get access to quality products or services.

This is especially applicable to sectors that provide products that are socially beneficial and considered utilities such as water, electricity, and gas.

For example, due to the extensive use of land for the laying of water pipes, the government often regulates water supply companies within regions such that only a few companies are allowed to operate and supply the whole region.

This is done to prevent duplicity of infrastructural work and ensure easier monitoring of the water companies so that they meet the requirements for providing potable water to citizens.

The government may also regulate industries that contribute either directly or indirectly to national security to protect the nation from any occurrence that may pose a threat.

For example, companies that produce and sell ammunition are highly regulated and monitored by the government to prevent the undue proliferation of firearms and other ammunition within the country.

Companies that produce food, drugs, and skin care products are equally monitored by the government to prevent the manufacturing of products that could become health hazards to its citizens.

In the United States, for example, companies that operate in the food, drugs, and skin care products industry are required to get approval from the Food and Drug Administration (FDA) which allows them to produce. They also need to renew it after one to two years depending on the industry to continue operating.

Another sector that is regulated by the government is commercial airlines. It is regulated to ensure that only companies that have the requisite number of planes and employee capacity operate. This also simplifies monitoring and aids in controlling air traffic.

Additional industries that are often regulated by the government include electricity, cable telephone, banking, first-class mail delivery services, defense contractors, trucking firms, and oil companies.

Legal entry barriers

  1. Patent
  2. Trademark
  3. Copyright
  4. Trade secrets

The ideation, research, creation, and production of novel products takes time and money. Innovators therefore need some time to recoup their investments.

Legal barriers to entry exist in monopolistic markets, often serving the purpose of protecting the intellectual property of individuals or corporate organizations.

They are aimed at protecting and giving the owners of groundbreaking discoveries or other novel ideas, the opportunity of benefiting from their intellectual property for a specified period.

Legal barriers to entry are supported by the Constitution of the United States as specified in Article 1 Section 8 Clause 8:

The Congress shall have Power. . . To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.

U.S. Constitution

This article enabled the creation of the U.S. Copyright, Patent, and Trademark Offices. Apart from the United States, several countries around the world have extant laws to protect intellectual property.

Although the periods and exact provisions of these intellectual property laws vary across countries, there have been ongoing negotiations through international treaties and the World Intellectual Property Organization (WIPO) to harmonize these laws and ensure that they are respected across different regions.

Patent

Patents are one of the legal barriers that companies who want to enter a monopolistic market may face. A patent confers on its owner the exclusive right to make, use, or sell their invention for a specified period.

This serves as a means of enabling individuals or corporate organizations to recoup some of the money spent on research and development through the sale of their invention or product before competitors gain access to it and flood the market at a cheaper rate. While the patent is active, no other individual or group can use the invention

In the United States, exclusive patent rights last for 20 years, which means that for these years, new companies who want to produce the same product cannot enter the market unless they are producing a different product from that that was patented.

Trademark

Another legal barrier to entry is a trademark. This is an identifying name or symbol for a particular brand or product. Global brands such as Apple, Amazon, Alphabet, Meta, Tesla, and Coca-Cola have trademark protection for their brand names and logos.

For example, no other firm can use the bitten apple logo of Apple because it is trademarked and identifies products made by the company. Simlarly, no clothing brand can use the swoosh sign because it has been trademarked by Nike.

Unlike patents that expire after 20 years and are not renewable, a trademark can be renewed several times provided that it remains in active use.

In the United States, a federal trademark lasts 5 years within the first 10 years of registration and for 10 years in subsequent years. This means the trademark owner renews their trademark with the U.S. Patent and Trademark Office (USPTO) after every 10 years.

Copyright

Copyright serves as legal protection for original works of art and authorship such as architectural, audiovisual, cartographic, choreographic, dramatic, graphic, literary, musical, pantomimic, pictorial, and sculptural creations.

For any work that has been copyrighted in the United States, the legal protection lasts for the lifespan of the person or entity that has the copyright with an additional 70 years afterward. Works produced under pseudonyms are protected for 95 years from the year of publication.

This implies that throughout the copyright period, no one can display, perform, or reproduce the copyrighted work without express permission of the author as the owner has the right to be credited for their creation.

The copyright holder is the only one authorized to determine who may financially benefit from the work, adapt it to other forms, perform it, and other related rights.

Once the copyright expires, the work is transferred to the public domain and becomes accessible to everyone who may want to repurpose and build on it.

Trade secrets

Trade secrets also ensure that competitors cannot replicate existing products made by existing companies. These trade secrets could be ingredients, processes, or procedures that are exclusively used by certain companies in their production and kept secret such that no other company can access them.

An example is the secret formula that Coca-Cola uses in giving its cola drink a distinct taste compared to other existing cola drinks in the market.

Industrial barriers to entry

Another monopolistic competition barrier to entry is industrial regulations and requirements. These are often set up by industrial bodies and have to be met or adhered to by all companies that wish to operate in said industry.

For example, some industrial requirements for clothing manufacturers in the United States include having a standard manufacturing plant, registering the chemicals used in fabric production, meeting clothing and textile standards, and accurate labeling of fabrics.

For the pharmaceutical industry, it includes having the necessary certifications, equipment, and personnel.

Additional industries that have industrial requirements that discourage new entrants include hospital, retail, electricity, construction, and oil industries.

Natural barriers to entry

  1. Control of a natural resource
  2. Recognized existing producers
  3. Network effects
  4. Economies of scale
  5. Consumer loyalty

Control of a natural resource

When certain companies have access to certain natural resources such as precious stones or metals, oil, and other natural resources, it naturally limits the entry of new companies.

This is because even if new companies wish to join the industry, they do not have access to the needed natural resources and hence, cannot compete with the existing companies that have access to these resources.

For example, oil is a scarce resource and only a few companies have access and rights to explore, refine, and distribute it. Thus, companies such as Chevron, ExxonMobil, Shell, and Total Energies, are some of the few companies that operate in the industry.

Recognized existing producers

A strong and recognized brand name for existing producers is an additional market entry barrier in a monopolistic market. This is because most of these brands have been so identified with their products that similar products produced by other brands are still called by the recognized brand’s name.

For example, Kleenex and Jell-O, have identities so strong that their brand names are synonymous with disposable tissues and gelatin respectively.

Thus, a firmly established brand name and product becomes a huge barrier for new entrants in the market because the existing brands already enjoy a high level of public perception and acceptance.

Network effects

Network effects occur when the value of a product increases due to its sheer popularity and usage by a significant number of people. This is an advantage that is often enjoyed by companies that are the first to provide certain products as more people get to use their products or services.

For instance, most people use Microsoft Word for word processing. Thus, instead of using a word processing software that may pose compatibility and other challenges for one when sharing Word documents, most people opt to use the most commonly used word processor.

Apart from software, people often join social networks such as Facebook, LinkedIn, and X that already have a high membership rate because they are sure to connect with most of their family, friends, and colleagues who are already using the site.

These network effects are entry barriers in a monopolistic market that could discourage or hinder new entrants.

Economies of scale

Economies of scale are one of the prime barriers to entry in any market. These are cost savings advantages enjoyed by large existing companies due to their high purchasing power and size.

In most instances, the cost per unit of output increases with decreasing scale and decreases with increasing scale. This is because fixed costs are spread over the higher output.

Due to the bulk purchase of raw materials, these companies have more leverage to bargain and get raw materials at cheaper rates when compared to smaller companies. They can also leverage their size and production capacity to reach more consumers.

In most instances, new entrants do not have the resources to match the purchases of existing firms, they additionally need a considerable amount of time to be accepted by consumers. These factors are often daunting and discourage most entities from venturing into the market because they face a high-cost disadvantage.

Consumer loyalty

Consumer loyalty to specific brands is an additional deterrent for new entrants in a monopolistic market. In most instances, consumers are loyal to a particular brand due to prolonged usage, product quality, price, or all the aforementioned.

When this happens, these consumers are often unwilling to try out products from other brands as they are already used to specific brands. Thus, even when new companies produce similar goods, they are likely not to get the needed patronage to break even and scale their companies.

Thus, the business may end up closing due to a lack of sufficient revenue to keep the business operational. When this keeps happening to new entrants, subsequent investors and business moguls will not want to invest in such a sector as they would not want to waste their time and resources on a business that will eventually fail due to customer loyalty to existing brands.

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What effect do barriers to entry have in a monopolistically competitive market?

In a monoploistically competitive market, barriers to entry have the effect of discouraging potential competitors from entering the market. Thus it may limit the level of competition in the long run.

Governmental barriers ensure that citizens are protected from counterfeit products. They also provide quality control for the industries they monitor because they ensure that the company products or services meet certain benchmarked standards before they are sold to consumers.

Existing laws that protect intellectual property such as patents, copyrights, trademarks, and trade secrets also affect new entrants as they too will have to spend on research and development of new ideas, products, or services before they can compete in the market.

Barriers to entry such as consumer loyalty, extensive brand recognition, high capital requirements, large marketing budgets, industrial requirements, and economies of scale further prevent new companies from joining the monopolistic competition market.