Barriers to Entry and Exit
Entry and exit barriers limit the number of firms competing in a product market or industry. Entry barriers lessen the degree of competition by imposing hurdles that decrease the ability of new entrants to operate profitably. One result is that firms operating in an industry protected by strong entry barriers tend to benefit from higher prices, and thus profits, than do firms operating in an industry without strong entry barriers. In contrast, exit barriers increase the degree of competition within a product market or industry by imposing obstacles that make exit difficult or costly. The rivalry between firms in an industry with strong exit barriers tends to be more intense than the rivalry between firms operating in an industry where exit is easy or relatively costless. One result is that firms in an industry with strong exit barriers tend to suffer lower prices and, thus, profits.
What entry and exit barriers have in common is their strong impact on the nature of competition: In the case of entry barriers, competition is lessened, while in the case of exit barriers, competition is magnified. This relationship between competition and entry and exit barriers has important ethical implications associated with erecting and maintaining various forms of entry and exit barriers. Competition benefits consumers; it ensures that firms operate efficiently and share the resulting gains by lowering prices, boosting innovation, improving quality, and/or further increasing profitability. Firms can also benefit from competition; consider the case of Pepsi and Coke, whose rivalry has significantly increased cola consumption. However, all else being equal, firms prefer to erect and maintain barriers to entry that furnish them some level of protection from highly competitive forces. Different barriers will benefit consumers versus firms in different ways. Some forms of barriers to entry and exit are more likely to engender a sense of commutative justice, where both consumers and firms benefit equally. Other types of barriers may justly favor one over the other, creating an undercurrent of distributive justice. Finally, some barriers may unjustly benefit one group at the expense of the other. Understanding how barriers to entry and exit affect the distribution of benefits between consumers and firms is crucial to comprehending their ethical implications.
Entry barriers can be broadly classified according to whether they are internally based or externally based. Internally based barriers to entry appear when managers make investments that give their firm a competitive advantage, thus allowing them to charge above-average prices, capture high market share, and/or benefit from an extraordinary cost position. Such investments develop into entry barriers when they become costly enough to discourage potential new firm entrants. Externally based barriers to entry appear when managers successfully...