Bain measured the height of the barriers to entry by the extent to which incumbent
firms were able to raise price above the perfectly competitive level without attracting entry.
He identified industries where barriers were very high (a mark-up of 10 per cent in price)
to substantial (a mark-up of 5–9 per cent) to moderate to low (a mark-up of 1–4 per
cent). It is interesting to note that in some markets (cosmetics, for instance) the mark-up
in price can be in excess of 100 per cent! (Note: mark-up pricing is discussed in detail in
Chapter 9.) Thus in Figure 8.1 the competitive price is PC (i.e. the price that would prevail
under perfect competition in the long run) and the prevalent price is PL which is higher
than the competitive level. In the absence of barriers to entry, such a price level would
encourage new entry, supply would increase, price would be forced down to its competitive
level and any abnormal profits would be competed away. It is only the presence of
barriers to entry which enable price to be maintained above its competitive level. Bain
identified four main barriers to entry which have all been considered briefly along with
others in Chapter 7. The four were product differentiation (which is further considered
below), absolute cost advantage, economies of scale and initial capital requirements.