Th3.4: Types of Barriers to Entry and Exit

Question 1

Some barriers are natural barriers, sometimes called…

Answer 1

innocent entry barriers - these include natural monopolies and high entry/sunk costs

Question 2

However, others are put in place by existing firms in the industry. They include…

Answer 2

patents and copyrights as well as high levels of advertising and branding

Question 3

Why must both costs for the entry and exit must be high for the market to have low contestability,?

Answer 3

since if entry costs are high but the firm is able to make profit once in business and not lose much of this profit if they leave, then the market is still contestable

Question 4

Legal barriers

Answer 4

can prevent new firms from entering an industry. laws are put in place which make it more difficult for firms to enter the market, or explicitly mean they cannot enter

Question 5

Marketing barriers

Answer 5

high levels of advertising build up consumer loyalty, so demand becomes more price inelastic and consumers are less likely to try other brands

Question 6

Marketing barriers: new firm v established

Answer 6

new firms entering the industry are unlikely to have the funds to undertake large scale advertising so struggle to compete with the incumbent firms - this may also be a barrier to exit as losing a brand/consumer loyalty will be a cost of leaving the market

Question 7

Pricing decisions of incumbent firms

Answer 7

predatory pricing means prices are so low that firms are driven out of the market and so it would be extremely difficult for new firms to enter. limit pricing discourages the entry of other firm as prices are set at a level to prevent new entrants - some firms may employ anti-competitive practices e.g refusing to supply retailers which stock other competitors

Question 8

Capital start up costs

Answer 8

some industries have high capital start up costs, e.g buying machinery necessary to begin production. sunk costs may also be high

Question 9

Economies of scale

Answer 9

mean that new firms are unable to produce on the same AC curve as large, independent firms. if they were to enter the industry, their costs would be higher and so prices would be higher and they would be unable to compete

Question 10

Cost to write off assets, pay leases and make workers redundant

Answer 10

barriers to exit prevent firms from leaving a market quickly and cheaply. they include those listed before

Question 11

What are the five types of barriers to entry and exit?

Answer 11

legal barriers
marketing barriers
pricing decisions of incumbent firms
capital start up costs
economies of scale