barriers to entry and exit (sources of monopoly power)

what are barriers to entry

any obstacles that prevents a new firm entering a market

what do you use to remember the different barriers to entry

lloyds TSB

what are the different barriers to entry

legal

technical

strategic

brand loyalty

what comes under legal barriers to entry

patents

licences/permits

red tapes

standards and regulations

insurance

what is a patent

you have sole ownership of something you have created and no other firm can copy you

why is licences/permits a barrier to entry (legal)

if you need a licence or permit to operate in a market and they have all been given out you cannot enter

what is red tape

excessive bureaucracy and paperwork

why is standards and regulations a barrier to entry (legal)

if there are excessive standards and regulations it can be costly for a firm to enter the market

why is insurance a barrier to entry (legal)

some markets may require certain insurance which can prevent firms from entering

what are technical barriers to entry

industry specific barriers to entry to do with something within the industry

what comes under technical barriers to entry

starts up costs

sunk costs

economies of scale

natural monopoly

what are start up costs

the initial investment a new firm must make before it starts operating

what are sunk costs

costs which cannot be recovered when a firm leaves the market

why is economies of scale a barrier to entry (technical)

if firms in the market have got very high economies of scale in the market already which leads to low average costs and may disincentivise new firms to enter the market

why is a natural monopoly a barrier to entry (technical)

any new firms would be driven out of the market very easily

what are strategic barriers to entry

when firms in the market already act in a threatening way

what comes under strategic barriers to entry

predatory pricing

limit pricing

heavy advertising

what is predatory pricing

pricing lower on purpose to drive out competition

what is limit pricing

when firms price at normal profit to take away the incentive for new firms to enter the market and limit competition

why is brand loyalty a barrier to entry

new firms will not be able to compete with those firms because all consumers will only buy the other firms products

what is a barrier to exit

any obstacle that prevents a firm leaving a market

what are the different barriers to exit

under valuation of assets

redundancy costs

penalties for leaving contracts early

sunk costs

what is under valuation of assets

when you are trying to sell the assets you bought when entering the market but the price is much lower than it was

what are redundancy costs

costs you have to pay to your workers as a result of shutting down