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
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.
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 ....... 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.