Economics - Market Structures (Year 2) - Barriers to Entry

What are 3 ways the nature of an industry can create/build barriers of entry?

- intensity of capital (some industries are capital intensive and so need large upfront expenditure before a firm makes any revenue - smaller businesses may not be able to enter the market) - barriers to exit (if investment can't be recovered upon leaving the market, it may make any attempt to enter a market very risky and unappealing) - min. efficient scale of production (any new entrants will be operating at a higher point on the AC curve than established firms - any new entrant has a larger production cost per unit so would have to sell the products at a higher price)

What are 3 ways government regulations can create/build barriers of entry?

- licensing (if an activity needs a licence, it restricts the number and speed of entry of firms into the market) - regulations (health and safety ones for employees that firms have to abide by, and certain industries have regulators that firms need to be approved by before being able to do certain things). - planning permission (needed for new factories)

What factors affect how long established firms can make supernormal profits for? (2)

- the height of the barriers to entry (i.e. how long the barriers can prevent new firms from entering the market) - the level of supernormal profit being earned (because larger profits = new entrants try to overcome the barriers harder)

What are the 3 main types of barriers to entry into a market?

- the tendency of incumbent (established) firms to create/build barriers - the nature of the industry; creating barriers that incumbent firms and new entrants cannot control - the extent of government regulation and licensing

How can new entrants into a market be successful?

if they are large, successful companies that wish to diversify into new markets (they have more money and so may be more able to break into new markets)

Perfectly competitive markets have ____ barriers to entry

no

In real life, there are normally ______ barriers to entry, but they're not usually ______.

some, total

Pure monopoly markets have ____ barriers to entry. No new firms can enter, so the monopolist remains the only seller.

totalled

What are 5 ways in which an incumbent firm can create/build barriers to entry?

- an innovative new product/service (can give a head start over rivals, makes it hard for new entrants to overcome due to e.g. patents that are legally protected) - strong branding (products well known to consumers, familiarity makes consumers pick their products first - disadvantages for new entrants) - quality of products/effective advertising(the difficulty and expense to the new entrants make it hard for them to attract consumers away from the incumbent firms' products) - aggressive pricing tactics (incumbent firms can drive new entrants out of the market before it becomes established, incumbent firms might be able to lower prices to very low levels that new entrants cannot match (by economies of scale) and drive them out of business) - price war (that alone could deter new entrants from entering the market)

What does the height of the barriers to entry depend on? (2)

- how long/expensive it will be for a new entrant to enter the market and establish itself (increase competition) - if new entrants can successfully enter the market at all