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Chapter 14: Problem 2

What do barriers to entry have to do with the extent of competition in an industry? What is the most important reason that some industries, such as music streaming, are dominated by just a few firms?

Short Answer

Expert verified
Barriers to entry can determine the extent of competition in an industry, with higher barriers often leading to less competition. The main reason some industries like music streaming are dominated by a few firms could be due to high licensing and tech development costs, economies of scale, and network effects.

Step by step solution

01

Understanding the Concept of Barriers to Entry

Barriers to entry refer to the obstacles that prevent new competitors from easily entering an industry or area of business. Barriers can include things like high startup costs, complex licensing requirements, or even aggressive competition from established firms.
02

Relating Barriers to Entry and Competition

If there are high barriers to entry in an industry, it is harder for new firms to enter the market. This could reduce the competition in the industry because there will be fewer firms. Conversely, if the barriers to entry are low, more firms can enter the market, leading to greater competition.
03

Identifying Reasons for Few Dominant Firms

In industries such as music streaming, the dominance of a few firms may be due to factors such as the high costs of obtaining licenses for music or tech development, economies of scale that benefit large firms, or network effects (where a product becomes more valuable as more people use it, encouraging a concentration of users around a few popular products).

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