Barriers to Entry Flashcards
Barriers to entry
Obstacles to new firms entering the market
Why might it be difficult for new firms to enter a market?
1. High startup costs
- if capital and machinery is very expensive it would be harder for smaller new firms to start up
- some industries may require high research and development costs
2. Legal barriers
- there may be regulations that firms need to comply by
- patents means that some firms may not be able to enter the market due to property rights
3. Economies of scale
- if there are big established firms already in the market they are going to have lower average costs
- so are able to sell their goods for lower prices and benefit from economies of scale
- however smaller firms entering the market are not big enough to benefit from economies of scale and have larger costs as they need to buy lots of capital
- bigger firms needed by suppliers more and so suppliers are willing to give discounts and allow bigger firms to bulk buy
4. Predatory pricing
- when large established firm set prices below the variable cost and so new firms are not able to compete and sell out these prices
- smaller firms cannot lower their prices as it was lead them to not making a profit which they can’t do as they are focused on survival
- smaller firms driven from the market
5. Limit pricing
- normal profit is when AC = AR
- when large firms operate at this level so there is no incentive for any other firm to enter the market as there is no supernormal profit being made
- limits small firms to enter the market as they would make the same amount of profit in other markets
6. Brand loyalty
- high levels of brand loyalty will make it harder for smaller firms as consumers trust the brand already and think quality is better
- a new smaller firm entering the market may have lower prices but people may start to think that the quality is very low
- consumer inertia which means people cannot be bothered to switch
7. Ownership to raw materials
- very difficult to get low cost of materials for smaller firms
- larger firms already in the market are bulk buying so becomes difficult to receive discounts for smaller firms
Barriers to exit
obstacles to firms leaving the market
Why might it be difficult for firms to leave a market?
1. Sunken costs
- money that is not recoverable e.g from advertisement
- specialized capital in one market cannot be used in another market when the firm leaves the market
- may also be costly to leave the market
- may not be able to sell the machinery to other firms as it’s just only specialized to one firm
2. Contracts
- even if they are shutting down they are obliged by ongoing contracts
- have to pay a lot of money to cancel the contract
- may not be able to leave the market as they don’t have enough money to pay the contract
