How do barriers to entry affect market competition?

Barriers to entry refer to obstacles that make it difficult for new firms to enter a particular market. When these barriers are high, it becomes challenging for potential competitors to establish themselves and offer alternatives to consumers. This situation often leads to a concentrated market where a few established companies dominate. As a result, reduced competition can lead to higher prices, less innovation, and fewer choices for consumers, ultimately harming the overall efficiency of the market.

Lower barriers would enable new entrants, leading to more competition, which can benefit consumers through better prices and innovation. Conversely, when barriers are significant, they can stifle the entry of new companies, preserving the status quo and allowing current market leaders to maintain their power without pressure from emerging competitors. Hence, recognizing how barriers to entry function is crucial for understanding market dynamics and the health of competition within different industries.