4.1.2 Barriers to entry

Question 1

contestable markets

Answer 1

Have low barriers to entry

Question 2

barriers to entry

Answer 2

Key factors that prevent firms from entering the market

Question 3

Easy entry

Answer 3

Being able to start up a new business without having to invest vast sums of money or comply with difficult regulations

Question 4

Predatory pricing

Answer 4

Lowers prices to a level to force new entrants to operate a loss

Question 5

examples of barriers to entry (6)

Answer 5

• product differentiation : need finance to create differentation by innovation or lower prices eg cars
• branding in elastic markets with multiple competitors –> habit
• start up fixed costs: if need high cost capital to enter market, need financing to support; smaller firms are seen as higher risk and may find it difficult to access this capital
• intellectual property rights: pharmaceutical drugs, music, innovation –> patents and copy rights =legal barrier
• unfair competition: eg natural monopolies like water eg
• vertical integration: control over supply and distribution –> major breweries also control pubs eg so smaller firms find it hard to sell their products

Question 6

market structure and barriers to entry

Answer 6

• Markets where barriers to entry are least significant will be contestable
• Barriers to entry lead to oligopolies – financial power for ads and R+D
• Major barriers for natural Mons → eg water, can only have 1 sewer system
• Global markets are competitive due to larger amount of firms

Question 7

what is a contestable market

Answer 7

• Main feature is low barriers to entry and exit
• Contestibility is a way of measuring how competitive a market is
• Setting up in a contestable market is easy and so is leaving → if a market is not contestable, it is hard for new businesses to enter, and therefore little competition

Question 8

why do firms prefer to produce in a contestable market

Answer 8

• Firms seek to maximise profits in the short run and are free to leave a market once the profits arent as high
• Market is more dynamic
  1. Firms can enter, this increased competition decreases price and decreases revenue in the long run
  2. Increased costs (due to competition driving up differentiation costs/factors of production) decrease revenue
  3. Due to the profit motive, firms leave this market to find a more profitable one
  4. Due to little barriers to exit, firms can leave after they have exploited a market and gained abnormal profits
• There are little entry/exit from a market due to a lack of sunk costs
• Less brand loyalty, so consumers easily switch between firms if one becomes more competitive

Question 9

sunk costs

Answer 9

• Money spent cannot be retrieved if the firm leaves the industry, unlike other assets which may be sold
• Sunk costs include costs for training, advertising, building infrastructure if it cannot be sold → however can leave technology transfer

Question 10

monopsony

Answer 10

• Single powerful buyer of a particular type of labour eg NHS
• Will pay lower wages and employer fewer people
  1. Employer has buying power over employees, and therefore have wage-setting power
• Potential cause for market failure
• Wages they pay will not necessarily reflect the true value of the labour