Entry Barriers in Markets
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Entry Barriers in Markets

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Entry Barriers in Markets Entry Barriers in Markets Presentation Transcript

  • Monopoly and Barriers to Entry A2 Micro Economics Tutor2u, April 2012
  • Razor Sharp Competition or Big Barriers to Entry? V
  • 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 competitors 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 AC – E.g. economies of scale – Lower unit costs for an established business SAC1• Advertising and Marketing – Establishing branded products – Makes demand less elastic SAC2 – Lowers cross price elasticity SAC3• Brand Proliferation – Brand proliferation disguises from consumers the actual LRAC concentration in markets such as detergents, confectionery and household goods. Output
  • Economies of scale, the size of market demand and entry barriersPrice, SAC1Cost SAC2 Demand AR (industry) SAC3 Minimum efficient scale is high % of market demand Output (Q)
  • In contrast .......Price, DemandCost (industry) LRAC (firm) 200 Output 1000 (Q)
  • In contrast ....... Low MES –Price, Demand scope forCost (industry) greater market competition LRAC (firm) Here the MES is a smaller % of industry 200 demand Output 1000 (Q)
  • 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
  • Tutor2uKeep up-to-date with economics, resources, quizzes and worksheets for your economics course.