This document discusses barriers to entry and exit in markets. It identifies several types of barriers that can protect monopolies and maintain supernormal profits: 1) Structural barriers like economies of scale, vertical integration, control of technologies, brand loyalty can block potential competitors. 2) Strategic barriers such as predatory pricing can limit competition. 3) Statutory/legal barriers including licenses, patents, copyrights can provide legal protections that exclude others. These are especially important in industries like pharmaceuticals, telecom, and transportation. Licenses, patents, economies of scale, and branding/differentiation are highlighted as major barriers that incumbent firms use to defend their market power against new entrants

1. Monopoly and Barriers to Entry
A2 Micro Economics
Tutor2u, April 2012

2. Razor Sharp Competition or Big
Barriers to Entry?
V

3. 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

4. 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

5. 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

6. Licences in Action

7. Barriers to Entry in the Taxi Market

8. 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.

9. Patent protection / patent wars

10. 2012 – Many patent battles in
digital industries

11. Discovering the IP in an iPhone

12. 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

13. Economies of scale, the size of market
demand and entry barriers
Price, SAC1
Cost
SAC2
Demand
AR
(industry)
SAC3
Minimum
efficient
scale is high
% of market
demand
Output
(Q)

14. In contrast .......
Price, Demand
Cost (industry)
LRAC (firm)
200 Output 1000
(Q)

15. In contrast .......
Low MES –
Price, Demand scope for
Cost (industry) greater
market
competition
LRAC (firm)
Here the
MES is a
smaller % of
industry
200 demand
Output 1000
(Q)

16. 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

17. Reducing entry barriers
• Technological
change in markets –
e.g. impact of
disruptive
technologies
• Removal of
statutory barriers –
market liberalisation
• Globalisation of
markets – increasing
competition

18. Tutor2u
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