market entry barriers

8/11/2019 Market Entry Barriers

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Market Entry Barriers

What makes it difficult for potential

competitors to enter a market?


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THERE ARE FOUR FACTORS

Under certain conditions.


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ECONOMIES OF SCALE


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SIZE


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Economies of Scale

Larger fixed cost- lower average total per-unit-

cost for bigger firms.

When the assets needed for high scale

productions can be leased, transferred or

resold later without a major loss of value, this

is not a significant barrier.


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Economies of Scale

Example:

Ship-building

Much of the equipment needed to produce ships is of

little use in producing other things.

The firm has to continue operating for a lengthy period

of time as long as the variable operating costs are

recoverable.


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Economies of Scale

Incumbents are hard to overthrow.

Competitors need massive investments and a long

period of recovery. They might want to think this

out.

The incumbent firm becomes the dominant firm,

and if it captures the market, the cost advantages

that comes from it size will protect it from itsrivals.


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Control over an Essential

Resource

Greedy is Good


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Control over an Essential Resource

Control over an essential resource gives a firm

the upper hand.

Resource monopolies are seldom complete.

Other firms are challenged to find their way into

the markets.

Search for mineral deposits.

New technologies.

Substitute resources.


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Control over an Essential Resource

It may be a temporary barrier but it may be

enough to limit entry for only one seller.


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Government Licensing and other

Legal Barriers to Entry

License Please?


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Government Licensing and other Legal

Barriers to Entry

Non-payment of tax does not render a

business illegal, but non-payment of license

fees shall result into civil and criminal

persecutions.


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Barriers to Entry

What does licensing mean?

Is a requirement that one obtains permission from

the government in order to perform certain

business activities or work in various occupations.

Sometimes, licenses are of low cost, SOMETIMES.

OFTEN, they are costly and a major deterrent to

the entry of rivals.


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Barriers to Entry

Legal Barriers

Oldest and most effective method of business firm

from potential competitors.


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Barriers to Entry

What are the examples of this legal

barriers?

Tariffs

Exclusive Rights


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Patents

Reg. Phil. Pat.


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Patents

Everyone needs protection. Especially a

companys genuine product. That is why

patent protection was created.

A company seeking profit exerts effort to

engage in research and new products.


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High Barriers to Market Entry

Their critics- The Economists


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The discipline to producers are weakened.

Reduced Competition results in allocative

inefficiencies.


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Unregulated monopolists or oligopolistic

groups can often gain by restricting output

and raising price.


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The rent-seeking costs related to getting and

keeping monopoly power add to the welfare

losses resulting from allocative inefficiencies.


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High Barriers-Solutions

Let them in


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Solutions

Control the structure of the industry to ensure

the presence of rival firms.

Reduce artificial barriers that limit

competition.

Regulate the price and output of firms in the

market.

Supply NFA rice.- Supply the market with

goods produced by a government firm.


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Monopoly

Its all mine


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Monopoly

Single Seller

No good substitute. MERALCO

High barrier to the entry of any other firms.


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Monopoly

A profit-maximizing monopolists will lower

price and expand its output as long as

marginal revenue exceeds marginal cost as the

maximum-profit output MR will equal MC.

The monopolist will charge demand curve

consistent with that output.


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Monopoly

Sometimes, demand and cost condition will be

such than even will be such than even a

monopolist will be unable to earn economic

profit. A monopolist seldom calculates demand,

marginal revenue and other cost curves.

It is difficult for a monopolist to predict demandconditions and consumer response to quality and

price changes. The profit maximizing price.


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Oligopoly

Together


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Oligopoly

Few Sellers

Small number of rival firms

Interdependence among the sellers because each

is large relative to the size of the market.

Substantial economies of scale

High entry barriers to the market


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Interdependence among Oligopolistic

Firms

A firm that is deciding what price to charge,

output to produce, or quality of product to

offer must consider not only substitutes, but

also potential reactions of rival producers.


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Substantial Economies of Scale

Large Scale production is required to achieve

minimum average costs.

There is a small number of firms which means

that those firms must engage in large

productions to meet demand.


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Significant Barriers to Entry

As with monopoly, barriers to entry also exist

in oligopoly.

Economies of scale is the most significant

barrier to entry.

The option of small start is not available to

potential competitors, thus giving the existing

oligopolists the chance to eliminate

competitors before they grow.


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Significant Barriers to Entry

Other Factors:

Patent Rights

Control over an essential resource

Government-imposed restraints


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Oligopoly

When firms produce identical products, like

milk or gasoline, there is less opportunity fornon-price competition.

On the contrary, if differentiated products areproduced, they are more likely to use style,quality, and advertising as competitiveweapons.

Each firm attempts to convince buyers thatother products are poor substitutes.


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Price and Output under oligopoly

An oligopolist cannot determine the price that

will deliver maximum profit simply by

estimating its own costs and the existing

market demand.

The demand facing an oligopolistic form

depends also on the pricing behavior of its

close rivals.

market entry barriers

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