Barriers to entry and exit Flashcards
What are barriers to entry
Any obstacle that prevent a new firm from entering the market
What are the reasons for barriers to entry
- Legal
- Technical
- Strategic
- Brand loyalty
Remember Lloyds TSB
What are examples of legal reasons for barriers to entry
Patents, regulatory requirements and licenses/permits required
What are examples of technical reasons for barriers to entry
High start-up costs
High sunk costs like specialist machinery and advertising
Too much economies of scale so very low long run costs which new firms can’t match
Natural monopolies where there should only be 1 firm in the market
What are examples of strategic reasons for barriers to entry
- Incumbent firms use predatory pricing to drive new firms out of the market
- Incumbent firms use limit pricing to disincentivise firms from entering the market
- Incumbent firms use heavy advertising so new firms can’t compete
What are examples of brand loyalty reasons for barriers to entry
If consumers are extremely loyal to incumbent firms, then they would be unwilling to move to new firms entering the market
What are barriers to exit
Any obstacle that prevents a firm from leaving a market
What are the reasons for barriers to exit
- Undervaluation of assets
- Redundancy costs
- Penalties for leaving contracts early
- Sunk costs
How does the undervaluation of assets cause barriers to exit
When a firm wants to leave the market, if it can only sell its assets for a much lower price than it bought them for, then it may stay in the market for a while until assets go up in value
How do high redundancy costs cause barriers to exit
- If the costs you have to pay to workers when you shut down are too high, the firm is less likely to leave the market
How do penalties for leaving contracts early cause barriers to exit
- Could be contracts with suppliers, rent contracts, gas and electricity contracts etc
- High penalties for leaving these contracts may mean the firm doesn’t want to leave the market until the contracts expire
How do high sunk costs cause barriers to exit
High costs which the firm can’t recover when they leave the market so firm doesn’t want to leave
