Barriers to entry are economic, procedural, regulatory, or technological factors that obstruct or restrict entry of new firms into an industry or market. Barriers to exit are perceived or real impediments that keep a firm from quitting uncompetitive markets or from discontinuing a low-profit product. 2. Types of barriers: Innocent barriers are those that are part and parcel of the nature of the industry and have not been specially erected by the incumbents to hinder the entry of other firms. Strategic barriers are strategic entry deterrents that stop other firms from entering the market.
3. Innocent barriers. Cost advantages. The incumbent firm may have exploited the economies of scale that enables it to produce at a lower cost than any would-be new entrant which is passed over onto consumers through lower prices. Sunk costs. Some industries have very high start-up costs or a high ratio of fixed to variable costs that might be unrecoverable if firms leave the industry. This acts as a disincentive to enter the industry. Cost advantages independent of scale. Proprietary technology, know-how, favourable geographic locations, learning curve cost advantages.
The Term Paper on Indian Coffee Industry – A Market Analysis
... Capital Line), looked at market share of major players, their cost and pricing, entry-exit barriers from which identified coffee industry as an oligopolistic form ... run are determined by the barriers to entry. If there is high barriers to entry, new firms cannot enter the industry easily and hence cannot competed ...
4. Strategic barriers. Patents. They are government enforced intellectual property rights that allow the designer of a product the sole right to the exploitation of the invention for a number of years. They give the owner an exclusive right to prevent others from using their products, ideas, inventions or processes. Vertical integration. Control over supplies and sources of distribution enables the incumbents to deny raw materials and outlets to competitors and maintains their market power. Limit pricing.
The existing firms might lower their prices to a level where other firms are unable to compete, and drive them out of the industry. Advertising. The incumbents can spread the fixed costs of advertising over thousands of units which reduces the unit costs of advertising. New entrants to the market have to match the level of advertising expenditure but, without the volume of output, their unit costs of advertising will be higher. Furthermore, it enables firms to establish branded products and win customer loyalty making demand more inelastic.
International trade restrictions. Trade restrictions, such as tariffs and quotas, prevent foreign rivals from competing with firms in a domestic market. Predatory pricing. The practice of a dominant firm selling at a loss to make competition more difficult for new firms that cannot suffer such losses, as a large dominant firm with large lines of credit or cash reserves can. It is illegal in most places; however, it is difficult to prove. Non-price competition. Techniques to persuade customers to buy without changing the price and risk starting off a price war.
This might include loyalty cards, buy one get one free or the marketing mix that firms employ. Research and Development. Increasing their expenditure on R&D firms can come up with products that give them an edge over their competitors so they can increase the price above that of their competitors. Multiplicity of brands/brand proliferation. If consumers switch brands frequently, an existing firm can capture a larger share of the market by running a large number of brands. That makes it harder for new firms to find a niche in the market. 5. Evaluation:
Barriers to entry lead to efficiency in case with natural monopolies where competition would increase costs. An extremely high capital cost to set up and an enormous level of output needed to be attained to achieve MES enable to avoid the problems of duplication and wastage of resources in industries where there is room just for one firm. But: the firm becomes an absolute monopoly meaning it can charge any price unless government regulation is applied. Furthermore, consumers are denied the variety and choice > producer sovereignty. Barriers to entry secure abnormal profits that would otherwise be competed away.
The Essay on Rising Gasoline Prices Oil Iraq Consumers
By Joe McManus In these times of war threats and terrorism, it is becoming extremely difficult for United States diplomats to maintain friendly relationships with oil rich countries. As a result, the U. S. economy may be faced with a possible oil shortage and continuous rising gasoline prices. As stated in the article "All About the Oil", Time Magazine "Iraqi exiles flew into Washington, D. C. in ...
They might be used to invest in R&D leading to innovations and cost savings that could then be passed onto consumers through lower prices. But: consumer surplus is transformed into supernormal profits leading to welfare loss. Barriers to entry allow the firm to price discriminate which on the one hand gives opportunity to cross-subsidize loss-making services that have important social benefits, and enables poorer consumers to afford the product but on the other hand redistributes income from consumers to producers and doesn’t necessarily benefit the poorest.
Barriers to entry ensure high standards meaning that potential entrants have to acquire essential qualifications and skills before operating in an industry but it gives rise to unfairness issues because only rich can get in which increases the gap between rich and poor who are unable to enter the industry due to the costs involved in gaining required knowledge. Furthermore, there is no guarantee that the standards will be maintained since there is little or no competition and thus no incentive to be efficient.
Arguably, the existence of barriers to entry might result in price stability since there is little or no competition and a fear (oligopoly interdependence) or no need to compete on prices to attract customers. Even though price stability may result in increased consumer confidence, the question is whether the price charged is reasonable. Barriers to entry may lead to corruption whenever government regulation is involved. Moreover, corruption itself is perceived as a barrier to entry, with potential entrants put off by the uncertainty over what bribes to pay and when to pay them.
