4.1.2 barriers to entry

Question 1

What are the characteristics of contestable markets? [5]

Answer 1

• Contestable markets face actual and potential competition
• Entrants have free access to production techniques and technology
• No significant entry or exit barriers
• There is low consumer loyalty
• Number of firms in the market varies

Question 2

What is hit-and-run competition?

Answer 2

Firms entering an easy market, taking supernormal profits, and then leaving.

Question 3

What do barriers to entry aim to do?

Answer 3

Block new entrants to the market, as it increases producer surplus and reduces contestability.

Question 4

How can economies of scale act as a barrier to entry?

Answer 4

The greater the economies of scale that a firm exploits, the less likely it is that a new firm will enter as they would produce comparatively expensively, and so cannot compete.

Question 5

How do legal barriers act as a barrier to entry?

Answer 5

Things such as patents and exclusive rights to production mean other firms cannot enter the market. Gaining licenses, such as in the taxi industry, can be difficult and may deter firms from entering the market.

Question 6

How can consumer loyalty and branding act as a barrier to entry?

Answer 6

Can make a market less contestable, since demand becomes more price inelastic and consumers are less likely to try other brands.

Question 7

How can predatory pricing act as a barrier to entry?

Answer 7

It drives firms out of the industry and reduces contestability.

Question 8

How does limit pricing act as a barrier to entry?

Answer 8

It ensures price of a good is below what a new firm entering the market could sustain.

Question 9

How does vertical integration act as a barrier to entry?

Answer 9

As it means one firm gains control of more of the market. It could result in one firm gaining control of important technologies, and they might prevent another firm from gaining access.

Question 10

What do barriers to exit do?

Answer 10

Prevent firms from leaving a market quickly and cheaply.

Question 11

What are some barriers to exit? [3]

Answer 11

• Cost to write off assets and pay leases/contracts
• Losing a brand + consumer loyalty is considered a cost of leaving the market
• Cost of making workers redundant

Question 12

How are sunk costs a barrier to contestability?

Answer 12

As a market with high sunk costs is less favourable to enter due to the risks associated. This is likely to push a market towards a price and output similar to a monopoly.

Question 13

What are the types of economies of scale? [6]

Answer 13

• Risk bearing
• Financial
• Managerial
• Technological
• Marketing
• Purchasing