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Part - II

New entrants are attracted into an industry when the possession of market power is profitable. If barriers to entry are low, then the existence of very few firms may not result in economic inefficiency. The threat of potential entry keeps the industry operating at a competitive level. In this case, the market is a contestable market. However, if there are significant barriers to entry, the threat of competition is less. Barriers to entry exist when there are sunk costs- expenses that cannot be recovered once a firm has entered the industry. Where these costs are high, the industry probably operates as that of a monopoly.

Barriers to entry can take various forms. They are usually very high in industries where large amounts of specialized machinery are required and resale of that machinery is difficult. Reputation for quality and reliability of a product calls for high establishment costs, thereby leading to high barriers to entry. Even, expending resources to get governmental approval to enter an industry is another factor for high barriers. It has to be noted that, barriers to entry can be viewed as sunk costs in all these cases.

Changes in demand and other economic conditions in the market changes the behaviours of the firms in the industry. Sometimes, a single seller in the market may be forced to behave as if there were many more. On the other hand, there are times when great numbers of sellers are able to organize and act as a unified seller, through collusion. The only reason behind such actions is to increase profits. The key to their success is their ability to restrict sales. An interesting case study on private ground water markets for irrigation water in the state of West Bengal reveals that it is always profitable for the ground water extraction equipment owners to collude for price determination. The following section depicts how all these factors are working simultaneously with their sophistications in so less talked about area of business - private ground water markets for irrigation water in rural Bengal.

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* Contributed by: -
Riddhi Dutta,
MBA Finance, Leeds University Business School, UK,
Sourav Dey,
MA Economics, Jadavpur University, Kolkata, India.