Barriers to entry

Question 1

Define barriers to entry

Answer 1

• obstacles
• prevent new firms from entering industry and eroding incumbent firm’s profits
• natural or created
• basis of monopoly’s power
  -economic or institutional barriers

Question 2

Economic barriers to entry

Answer 2

1. Substantial EOS
2. Branding
3. Exclusive control over raw materials

Question 3

Substantial EOS

Answer 3

• industries with large initial capital investment, complex tech ie. aircraft
• only large firms can achieve lower AC, operate under decreasing cost conditions
• due to large output
• minimum efficient scale (MES –output with lowest possible cost) of pdtn occurs at high output lvl
• incumbent firms charge px lower than cost of small firms – drive them out
• cost disadvantage serves as deterrent

Question 4

Branding

Answer 4

• unique image and name of pdt
• customer loyalty
• convinced of product’s superiority
• PED<1
• discourage entry of new firms
• monopolistic comp and oligopoly

Question 5

Institutional barriers to entry

Answer 5

• government regulations; legal prohibition
• Patents: exclusive right to produce pdt/use particular process for given period of time
• Licenses: to operate certain svc e.g. radio broadcasting

Question 6

Evaluation of barriers to entry

Answer 6

• do not guarantee monopolist free frm comp
• new tech can destroy monopoly positions
• e.g. Sony Walkman – no longer dominant in portable music player industry due to phones and MP3 players