Fundamentals of Business

Classification and examples of barriers

Michael Porter classifies the markets into four general cases:

. High barrier to entry and high exit barrier - Examples:
Telecommunications, Energy
. High barrier to entry and low exit barrier - Examples:
Consulting, Education
. Low Barrier to entry and high exit barrier - Examples:
Hotels, Siderurgy
. Low barrier to entry and low exit barrier - Examples:
Retail, E-commerce

Those markets with high entry barriers have few players and thus high profit margins.
Those markets with low entry barriers have lots of players and thus low profit margins.
Those markets with high exit barriers are unstable and not self self regulated regulated, so the profit margins fluctuate very much along time.

Those markets with a low exit barrier are stable and self self-regulated, so the profit margins do not fluctuate along time.

The higher the barriers to entry and exit the more prone a market tend to be a natural monopoly. The reverse is also true. The lower the barriers the more likely to become a perfect competition.

Industry rivalry

Price war is a term used in business to indicate a state of intense competitive rivalry accompanied by a multi lateral series of price reductions. One competitor will lower its price, and then others will lower their prices to match. If one of the reactors reduces their price below the original price cut, then a new round of reductions is initiated. In the short term, price wars are good for consumers who are able to take advantage of lower prices. Typically they are not good for the companies involved. The lower prices reduce profit margins and can threaten survival.

In the long term, they can be good for the dominant firms in the industry however. Typically the smaller more marginal firms will be unable to compete and will shut down. The remaining firms absorb the market share of the terminated ones. The real losers then, are the marginal firms and the people that invested in them. In the long term, the consumer could lose also. With fewer firms in the industry, prices tend to increase, sometimes to a level higher than before the price war.