4.1.2 Barriers to entry
Types of barriers to entry
barriers to entry aim to block new entrants to the market
increases consumer surplus
reduces contestability
economies of scale
Legal barriers
consumer loyalty and branding
Predatory pricing
Limit pricing
anti-competitive prices
vertical integration
Brand proliferation
greater exploited economies of scale makes new firms less likely to join the market
new firms would produce more expensively - cannot compete
one firm has more control of the market
makes it difficult to enter
may lead to one firm gaining control of important
technologies
might prevent other firms gaining access to them
eg. patents and exclusive rights
to production (such as with television) mean other firms cannot enter the market
eg. taxi firms have to gain a market licence. new firms have to gain this licence - barrier to entry
used to saturate the market
disguises consumers from the actual market
eg. many
brands of the laundry soap market are provided by only a few large conglomerates
makes a market less contestable
demand becomes more price inelastic
consumers are less likely to try other brands
a brand can become associated with a product,
eg. ‘Hoover’
with vacuum cleaners
ensures the price of a good is below that which a new firm in the market could sustain
firms are therefore unable to compete with existing firms
eg refusing to supply retailers which stock competitors
when firms set low prices to drive out firms already in the market
short run - they make losses
as firms leave the remaining ones raise their prices to regain revenue
prices are below average cost - reduces contestability
Barriers to exit
cost of making workers redundant
losing a brand and customer loyalty
cost to write off assets and pay leases
high costs may discourage firms from leaving a market
firms have to pay these even after closure
could be cheaper to stay in the market
less contestable
Contestability
characteristics of contestable markets
face actual and potential competition
Entrants to contestable markets have free access to production techniques and
technology
no significant entry or exit barriers
no sunk costs in a contestable market
ow consumer loyalty.
number of firms in the market varies