entry barriers in markets
DESCRIPTION
Revision presentation for A2 miTRANSCRIPT
Monopoly and Barriers to Entry
A2 Micro EconomicsTutor2u, April 2012
Barriers to entry and exit• Block potential entrants
from making a profit• Protect the monopoly
power of existing firms• Maintain supernormal
profits in the long run• Barriers to entry make a
market less contestable
Types of Entry Barrier (1)• (1) Structural barriers– Economies of scale (consider a natural monopoly)– Vertical integration (backwards and forwards)– Control of important technologies / commodities– Expertise and reputation of the incumbent– Brand loyalty and brand proliferation– Inherent suspicion among consumers about new ideas
• (2) Strategic barriers– Predatory pricing / limit pricing– Heavy marketing spending / product differentiation
Types of Entry Barrier (2)
• (3) Statutory (legal) barriers– Licences (e.g. professional qualifications, banking licences,
licences to sell alcohol, taxis, run a night club or a casino)– Patents (e.g. In the pharmaceutical industry and in
telecommunications)– Copyrights and Trademarks– Public franchises e.g. Rail franchises, national lottery– Tariffs, quotas and other trade restrictions affecting
imports of goods and services
Licences in Action
Barriers to Entry in the Taxi Market
Patent Protection in a Market
• Patents– Offers legal protection of property rights – Generally valid for 12-20 years– Give the owner an exclusive right to prevent others
from using patented products, inventions, or processes
– Allows protection of intellectual property– If a company successfully sues another it can
demand a sales ban of its competitor's products, or force the loser to pay expensive licence fees.
Patent protection / patent wars
2012 – Many patent battles in digital industries
Discovering the IP in an iPhone
Cost Advantages and Marketing/Branding
• Absolute cost advantages– E.g. economies of scale– Lower unit costs for an
established business• Advertising and Marketing
– Establishing branded products– Makes demand less elastic– Lowers cross price elasticity
• Brand Proliferation– Brand proliferation disguises
from consumers the actual concentration in markets such as detergents, confectionery and household goods.
LRAC
SAC1
SAC2
SAC3
AC
Output
Economies of scale, the size of market demand and entry barriers
Price, Cost
Output (Q)
SAC1
SAC2
SAC3
Demand AR
(industry)
Minimum efficient
scale is high % of market
demand
In contrast .......Price, Cost
Output (Q)
LRAC (firm)
Demand (industry)
200 1000
In contrast .......Price, Cost
Output (Q)
LRAC (firm)
Demand (industry)
200 1000
Here the MES is a
smaller % of industry demand
Low MES – scope for greater market
competition
Barriers to Exit
• Costs associated with exiting an industry• (1) Asset-write-offs – E.G. plant and machinery, stocks
• (2) Closure costs– Redundancy costs, contracts with suppliers– Penalty costs from ending leasing arrangements
• (3) Lost reputation– Lost goodwill, damage to the brand
• Sunk costs are costs incurred when entering a market that are irrecoverable should a firm decide to leave
Reducing entry barriers• Technological
change in markets – e.g. impact of disruptive technologies
• Removal of statutory barriers – market liberalisation
• Globalisation of markets – increasing competition
Tutor2u
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