Barriers to entry and exit of firms

Question 1

What are barriers to entry ?

Answer 1

Any obstacle that prevents a new firm entering a market

Question 2

What are legal barriers to entry ?

Answer 2

Patents
Licences
Red tape ( excessive paperwork )
Standards and regulations
Insurance

Question 3

What are technical barriers to entry ?

Answer 3

Start up costs
Sunk costs
Economies of scale
Natural monopoly

Question 4

What are strategic barriers to entry ?

Answer 4

Predatory pricing ( low price to drive out competition )

Limit pricing ( firms place price at break even or normal profit to limit competition )

Heavy advertising

Question 5

What are barriers to exit ?

Answer 5

Any obstacle that prevents a firm from leaving a market

Question 6

What are some barriers to exit ?

Answer 6

Undervaluation of assets - people hold on until price rises

Redundancy costs - the pay workers receive from a firm shutting down

Penalties for leaving contracts early

Sunk costs