Entry and Exit Flashcards
What are absolute Barriers to Entry
Rule out, over some time horizon, all new entry
Give some examples of absolute Barriers to Entry
1 - Intellectual property rights
2 - Ownership of exclusive resources
3 - Exclusive supplier contracts
4 - Geographical barriers
What are relative Barriers to Entry
Place entrants at a disadvantage, but do not rule out entry
Give some examples of relative Barriers to Entry
1 - Economics if scale
2 - Switching costs
3 - Advertising
4 - Reputation
What condition is needed for economies of scale?
AC falls when Q rises
What is the minimum efficient scale?
Smallest Q at which economics of scale are exhausted
What are barriers to exit?
Conditions that impede the exit of capacity from an industry
Barriers to exit are high in industries with what characteristics?
1 - Durable and specialised assets
2 - Strongly unionised labour
3 - High costs associated with plant closure
What do exit barriers do?
Keep a firm in the market, even when the prevailing conditions are such that the firm would not have entered in the first place
Outline 3 responses to new entrants in a market?
1 - Blockaded Entry
Incumbent firms compete as if no threat from entry
2 - Deterred Entry
Incumbent firms modify their behaviour to deter entry
3 - Accommodated Entry
Incumbent firms find it (individually) more profitable to allow entry than to deter it
When are entry deterrence methods worthwhile?
1 - Incumbent earns higher profits as a monopolist than as a duopolist
2 - Strategy changes the entrant’s expectations about the nature of post-entry competition
When is a market perfectly contestable?
When a monopolist cannot set prices above long-run AC
Outline 3 entry deterrence strategies using price
- Limit Pricing
Incumbent attempts to deter entry by setting a low price before entry occurs - Capacity as Credible Pre-commitment
Incumbent uses excess capacity to deter entry
Entrant will expect entry to be contested - Predatory Pricing
A large incumbent sets a low price to deter entry and drive smaller rivals from the market.
Outline contestable limit pricing
Occurs when incumbent has excess capacity and a MC advantage over entrants
Set price below entrant’s MC and meet all market demand at that price.
Entry deterred
Outline strategic limit pricing
Use when contestable limit pricing will not succeed.
Incumbent sets a low price as a entry deterrent.
Entrant observes low price and infers that post-entry price will be as low or even lower.
This may be enough to deter entry
