BUSM 487 Ch.12 (Barriers to Entry)

Benefits of Pricing at MC

- Low prices can drive competition out of the market - Low prices can increase volume which can further reduce ATC

Risks of Pricing at MC

- Provides no margin to cover FC (sustainable in the shortrun, unsustainable in the long run)

Barriers that increase cost

-Economies of scale, experience, or learning -Other cost advantages (patents, land/location, economies of scope, preferential access to specialized resources) -Capital requirements -Network effects -Government policy

Barriers that limit market share

-Product differentiation -Advertising/brand image -Access to distribution -Switching costs

Learning Curves and Strategy: What are some of the strategic implications of learning curves?

1. Firms may be willing to price aggressively in order to descend the learning curve faster 2. Learning effects as a barrier assume no knowledge spillovers/leakage

Circumventing Barriers: 3 strategies to enter new markets

1. Leverage existing assets 2. Reconfigure the value chain 3. Create a market niche

What is a barrier to entry?

A barrier to entry is any factor that: -increases the cost born by potential entrants after they enter the market -decreases the market share potential of entrants upon entering an industry

What is a learning curve?

A learning curve is graphical representation of learning that increases with experience -Learning = declining costs per unit -Experience = cumulative production