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THE RESULTS OF COMPETITION: WINNERS AND LOSERS
As firms compete with one another, eventually a firm or a set of firms gains a competitive advantage. Perhaps the firms gaining this advantage have greater skill, or were more ruthless, or were simply lucky. As one group of firms gain an advantage, the rest of the firm in an industry are placed at a competitive disadvantage. One consequence of a temporary disadvantage is, among other things, a smaller proportion of industry sales and lower profits for the disadvantaged firms. If sales and profits fall to low levels for long enough, the firms at a competitive disadvantage might be forced to leave the industry. Perhaps because of falling revenue, some firms are not able to pay their creditors – these firms might be forced into bankruptcy. Or, perhaps the owners of the firm see the writing on the wall – and fear they will never be able to earn high enough profits in the industry – and they voluntarily leave the industry. Every year countless thousands of businesses shut their doors as they fail to make acceptable profit for the owners. But, as the losing firms exit the industry the existing firms—the winners— expand and take over the sales of the firms that have exited. Often, the winners—individually and collectively—find that their profits are greater now that some of their competitors have been forced to leave the industry. In short, competition creates winners and losers. The winners expand that grab a larger share of the market and often benefit from higher profits. The
at some point. In competition. an industry most likely has experienced a major decline in the number of competitors as the losers exit. Once the losers have left. And. so. The winners now battle among themselves and some past winners now become losers and they too exit the industry. a handful or perhaps a dozen or two of smaller firms might remain within the industry. A firm that appears to be on the way out might suddenly find some change in the produce that consumers really like or might sudden introduce a product much preferred by consumers. they don’t aim their competitive aggression at the small fringe firms. Yet nothing is given. Yet. earn lower profits and. perhaps eventually. though. or found small and often low-profit niches within the industry. .128 Evolution of Industries and Barriers to Entry losers lose market share. all bets are off. Not every firm losing the main battle within the industry is able to remake themselves as a niche producer: most firms that lose the main competition within the industry are forced to exit the industry. These fringe firms might produce a variant of the product that is much less profitable than the bulk of what is sold in the industry. are forced to leave the industry. Collectively. However. these fringe producers account for only a relatively small amount of the industries product. Larger firms come to dominate the industry. THE INDUSTRY AFTER A PERIOD OF COMPETITION After a long period of competition. The new batch of winners soon becomes split into winners and new losers. some firms that were unable to win in competition might seek to become small niche producers: specializing in the sale of that part of what the industry produces that is much lower profit than sold by the winning firms or which is sold in only a small amount and bigger firms are not interesting in producing that particular item. These firms might leave the industry either by choice or they might do so because they are forced to declare bankruptcy. firms that have been successful for year-after-year by reinvesting profits might find some innovation they have introduced fails and consumers stop buying from the previously successful firm. firms will fall far enough behind the others in the industry. The large firms have not interest in producing these low-profit variant of the product and. the firms that have won in competition now do battle among themselves. Alternatively.
Part of the reduce firms in an industry and part of the increased size of these firms comes about simply because firms have merged in order to enhance their profitability. . therefore. Figure 0-1 Car industry 1910 Car industry 1940 Car industry 1960 COMPETITION AND MERGERS Competition leads to fewer and larger firms as the winners expand and take sales away from loser firms. These advantages can lead to higher profits and greater competitive abilities. sometimes combine forces by merging. Competition—or the desire to win in competition—can also lead firms to merge with one another. Firms. Competition transforms an industry from one in which a large number of small firms dominate the industry to one in which a small number of large firms dominate the industry.Evolution of Industries and Barriers to Entry 129 The process involved in competition is illustrated in Figure 0-1. As will be discussed below. A few small firms might survive as niche producers that earn a level of profits too low to interest the main winners in the industry. larger firms can have advantages over smaller firms.
High profit industries attract a lot of attention from those outside the industry. In turn. profits are again pushed down for all in the industry. winners expand and winners— individually and collectively—earn higher profits. But by entering the industry—and increasing competition—they drive down profits. they want high profits. Moreover. But the higher profits of these firms attract the attention of entrepreneurs and firms outside the industry. often attract little attention.130 Evolution of Industries and Barriers to Entry THE ENTRY OF NEW COMPETITORS IN AN INDUSTRY But. businesses want profits. Figure 0-2 Machine tool Industry Car industry Construction industry . most often. the resulting higher profits) leads outsiders to consider entering the industry. If these outsiders do enter the industry. As competition within an industry occurs. before an industry becomes dominated by a relative small number of small firms a process can be set into motion that counteracts the development of large dominant firms. Competition does lead to a reduction in the number of competitors and some firms do get larger. When existing businesses are looking to increase their profits by expending into new industries and when new businesses are looking for a good industry to enter. on the other hand. much to their disappointment. these higher profits attract attention from outsider. This process is illustrated in Figure 0-2 below. In capitalism. They enter the industry hoping to earn higher profits. one of their goals is to find an industry in which the profits are high. that their success in competition (in particular. competition heats up to a higher level and. The new winners find. Low profit industries.
one or more of the new firms entering the industry might talented or lucky enough to drive out of business the once preeminent firms in the industry. competition increases and profits fall. Alternatively. But new firms appear to take the place of the exiting firms and competition never wanes. if firms are lucky to find themselves with barriers to entry (that were not intentionally constructed) they can also benefit from good profits for a lengthy period. It is the dream of every entrepreneur to find her/himself in the latter type of industry. Firms that have become winners in competition can find. One of the new competitors might push out of business one of the firms in the industry that had previously been a winner. In such an industry.” . a high level of profits can last for a long time. even. Other industries are able to find some release from continual relentless competition. Worse for the firms which once stood preeminent in the industry. If they can successfully construct barriers to entry then firms within the industry can benefit from continued high profits. they would like to construct “barriers to entry” for their industry. As new firms enter the industry. Still other industries find they are successful in significantly reducing or. firms that have achieved profitable positions within an industry would like to keep new firms from entering the industry.Evolution of Industries and Barriers to Entry 131 What the winners in an industry want is to find themselves a way to be not subjected to the continual appearance of new competitors. Why do some industries face relentless competition? Why do others face only a medium level of competition? Why do a few industries face very little competition? The key is often the absence or existence of “barriers to entry. In order words. BARRIERS TO ENTRY DEFINED Some industries are the site of relentless competition. however. eliminating competition. BARRIERS TO ENTRY Firms want to earn high profits. Winners win and push out loser firms. that the high profits they achieve disappear as new firms enter the industry. Not surprisingly.
Many other barriers to entry also exist. small rivals find it nearly impossible to survive again the large rival because they just can’t be price competitive given their much larger unit production costs. and local level) sometimes grants to individual firms the exclusive right to provide some good or service to buyers. BTE) are anything that hinders the movement of firms into an industry. Postal Service has a monopoly over regularly scheduled daily delivery and pickup of mail. For instance. The food concession in a municipal stadium is a monopoly created by a local government. The reason governments grant patents is to give an incentive for inventive activity. And. BTE reduce or eliminate the entry of new businesses into an industry. These patents give to the inventor the exclusive right to control the use of the invention. All of the following can provide a barrier to entry for firms outside the industry. the U. For instance. they can rest easy: new competitors generally start small and therefore have much higher unit production costs than the giant firm. LEGAL RESTRICTIONS Government (at the federal. in the 1960s IBM was so good at producing mainframe computers that few could compete with them. no one else can possibly compete with them. TECHNICAL SUPERIORITY Sometimes a business is so good at what they do. . PATENTS Governments grant patents to inventors.132 Evolution of Industries and Barriers to Entry Barriers to entry (or. local governments often grant monopolies to cable companies. These new. Other times BTE can slow down the entry of new firms: new firms appear but only slow. SELECTED BARRIERS TO ENTRY What can act as a BTE? The list is very long. That is. Where a firm has grown very large and significant economies of scale exist.S. Very low BTE. state. however. means that new firms can enter the industry relatively rapidly. ECONOMIES OF SCALE Economies of scale give large producers a significant cost advantage over small rivals. Sometimes BTE can be almost insurmountable: no new firms can enter an industry.
This leads potentially to higher profits for the remaining firms. CONTROL OF A SCARCE RESOURCE OR INPUT Sometimes a particular hard-to-find resource or input is needed to produce a good or service. Some firms spend huge amounts of money on advertising to keep new rivals from starting up business. Lawsuits against new rivals have been used to drive them out of business or to. Or. This has a very important consequence. If a company can gain control over this resource or input. BARRIERS TO ENTRY AND PROFITABILITY With a high level of BTE.Evolution of Industries and Barriers to Entry FINANCIAL REQUIREMENTS TO ENTER INDUSTRY 133 Entering certain industries often requires vast amounts of money. For instance. Barriers to entry help create high profit industries in an economy. at the very least. This major financial requirement services as a significant barrier to entry for many industries. firms can act exceedingly aggressive if faced with new competition by perhaps starting a major price war every time a new competitor enters their market. The same holds true for many other industries—so much money is required that very few outsiders can ever hope to enter the industry. a smaller number of old firms exist. to enter the auto industry you likely need billions of dollars. raise the cost of entering the business to very high levels. these high profits might remain. new competitors are unlikely to appear in the industry and competition is generally limited to firms already within the industry. they can gain a monopoly: only they will be able to produce the good or service because only they have access of the required input. Competition leads to winners and losers. Other industries that do not benefit from significant barriers to entry remain perpetually low-profit industries. ENTRY-DETERRING BEHAVIOR A firm can protect itself from competition by deliberately acting in a way that convinces potential competitors to not enter the industry. if barriers to entry keep out new competitors. As the losers exit the industry. But. .
it also independently contributes to a reduction in competition and to higher profits. This might take many years—perhaps decades—but high-profit industries protected by high barriers to entry will eventually disappear. however. then. . these firms will often earn profits higher than in other industries with low barriers to entry. industries with barriers to entry will often end up with a relatively few firms. Or. Competition leads to winners and losers. Almost all barriers to entry are temporary.000 if there are almost no BTE. Or. cannot easily enter the industry because of these barriers to entry. As time passes. 5. In other industries. However. And. Over time. perhaps patent protection runs out and new firm are now able to enter the industry. EROSION OF BARRIERS TO ENTRY Moderate and high barriers to entry can give firms within the industry good profits. perhaps they innovate and find a better product than that sold by firms within the industry. the number of firms might stabilize at 200 if moderate BTE exist. the number of firm in an industry might stabilize at. For instance. perhaps outsider firms find a way to produce the produce cheaply with new technology. more and firm outside firms find ways to break though the barriers to entry. the number of firms might stabilize at 5 firms if fairly high BTE exist. A relatively small number of firms is not only an indirect (but imperfect) indicator that BTE and profits are high. say. if profits are high enough in these industries outsiders will try to find some way to enter the industry. Firms outside the industry. Eventually they are overcome by outsiders or they disappear on their own.134 Evolution of Industries and Barriers to Entry BARRIERS TO ENTRY AND THE NUMBER OF FIRMS IN AN INDUSTRY One indirect (but imperfect) sign of high barriers to entry and one indirect (but imperfect) sign that high profits might exist in an industry is a small number of firms in the industry. Barriers to entry restrict the entry of new firms into the industry. In still other industries. Over time.
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