3.3.7 Market Structure and Concentration and Barriers etc.

Question 1

What are the three types of barriers to entry?

Answer 1

• Structural Barriers
• Strategic Barriers
• Statutory Barriers

Question 2

What are examples of structural barriers to entry?

Answer 2

• When costs for an entrant are higher than the incumbent firm, so they cannot establish themselves due to the inability to compete with prices.
• Natural cost advantages
• Capital cost barriers
• Sunk a Costs

Question 3

What are statutory barriers of entry?

Answer 3

Entry barriers given force of law e.g. patent protection of franchises

Question 4

What is the theory of the early mover?

Answer 4

If you grow first and become larger you can achieve economies of scale which leads to bigger business, which gives resources for innovation to further reduce costs until no entrant can compete.

Question 5

What are sunk costs?

Answer 5

Costs which cannot be recovered if a business decides to leave an industry

Question 6

What are some examples of some sunk costs that act as a barrier to exit?

Answer 6

• Capital inputs that are specific to an industry and have little or no resale value
• Money spent on advertising and market research that cannot be carried forward into another industry
• Closure Costs

Question 7

What are barriers to entry?

Answer 7

Barriers to block potential entrants from entering a firm profitably to protect the supernormal profits of existing forms

Question 8

What are strategic barriers to entry?

Answer 8

Any move performed by existing firms to reinforce their position against other firms of potential rivals

Question 9

Examples of strategic barriers to entry

Answer 9

Hostile takeovers
Predatory Pricing
Product differentiation
Capacity expansion

Question 10

What is the strategic entry deterrence tactic of product differentiation?

Answer 10

Investment in developing new products and advertisement to reinforce customer loyalty

Question 11

How does capacity expansion act from existing firms act as a strategic barrier to entry?

Answer 11

As the business increase in size, it can further exploit ne’er all economies of scale, making the difference in cost to a new entrant much higher

Question 12

What is predatory pricing?

Answer 12

A strategic barrier of entry where the dominant company lowers prices and suffers short term losses in order to force competitors out of the market, as they will be able to recoup them by raising prices when there is no competition.

Question 13

What are the ways entry to market can occur?

Answer 13

• Takeover from outside the industry
• A transfer of brand names to new industry
• Increasing competition from overseas

Question 14

How can capital costs be a barrier to entry?

Answer 14

The expense of buying the necessary capital to enter the industry may be too high

Question 15

What are homogenous goods?

Answer 15

Goods which are identical regardless of who produces them, e.g. Coal, steel, potatoes.

Question 16

What are non-homogenous goods?

Answer 16

Goods which can be differentiated from other competitors and allow a brand to be built around it

Question 17

How can imperfectly competitive industries compete?

Answer 17

Prices
Quality
After sales service
Delivery date
Brand image