Capital Requirements and Barriers to Entry

Abstract

The entrant into an industry may encounter difficulties in the attempt to raise the capital which may be necessary to enter successfully. There is a strong tendency in the industrial organization literature to talk of barriers to entry due to imperfections in the capital market. An early exception from this tendency is Stigler’s (1967) critique of the idea that capital market imperfections imply distortions. The reference model is the model of a perfect capital market, in which every potential borrower is able to borrow any amount he wishes at the going rate of interest. In considering reasons for deviations from this obviously unrealistic reference model, we can find out wheter these deviations have to be considered barriers to entry into any given industry or market.