Entry, Exit, Marginal Revenue, and Barriers to Entry

Vocabulary flashcards covering core ideas about marginal revenue, free entry and exit, long-run profits, and strategies incumbents use to deter new competitors.

Marginal revenue

The additional revenue earned from selling one more unit, equal to the output effect minus the discount effect.

Output effect

The revenue gained from selling an extra unit, equal to the price of that unit.

Discount effect

The revenue lost when a lower price applies to all previous units; calculated as the price cut (∆P) times the quantity affected (Q).

Trade-off (price vs. quantity)

Lowering price increases quantity sold but reduces revenue per unit, creating opposing forces that determine marginal revenue.

Economic profit

Total revenue minus total costs, including opportunity costs; attracts entry when positive and drives exit when negative.

Free entry

The ability of new firms to enter a market whenever economic profits are positive, pushing profits toward zero in the long run.

Free exit

The ability of firms to leave a market when economic profits are negative, reducing losses and moving profits toward zero.

Zero economic profit

A situation in which a firm earns exactly its opportunity cost; no incentive exists for entry or exit.

Long-run equilibrium

The point where entry and exit have driven economic profits to zero and demand just touches average cost.

Average cost

Total cost divided by quantity; in the long run, price equals this value under free entry and exit.

Average revenue curve

A firm’s demand curve, showing revenue per unit, which equals the market price.

Market power

The ability to raise price above marginal cost; diminishes when new rivals enter and increases when rivals exit.

Demand curve flattening

The increased elasticity of a firm’s demand curve after new competitors enter, leading to lower prices and quantities.

Demand curve steepening

The decreased elasticity of a firm’s demand curve after rivals exit, allowing higher prices and quantities.

Threat of entry

The possibility that a new competitor may enter, often enough to force incumbents to lower prices preemptively.

Barriers to entry

Obstacles that make it difficult for new firms to enter a market, protecting incumbent profits.

Demand-side strategies

Entry barriers that lock in customers and make it hard for rivals to win them away.

Customer lock-in

Situations where existing buyers find it costly or inconvenient to switch to another supplier.

Switching costs

Expenses—monetary or otherwise—that customers incur when changing suppliers, helping incumbents keep clientele.

Network effect

A product’s value rises as more people use it, making entry harder for firms without a large user base.

Supply-side strategies

Entry barriers based on unique cost advantages that newcomers cannot easily replicate.

Learning by doing

Cost reductions achieved through accumulated production experience over time.

Virtuous cycle

A feedback loop in which high production yields more learning, reducing costs and further reinforcing market leadership.

Mass production

Large-scale manufacturing that lowers per-unit costs, putting small entrants at a disadvantage.

Buying power

The leverage large firms have to negotiate lower input prices, creating a cost advantage over smaller rivals.

Limiting access to key inputs

Securing exclusive or long-term control of crucial resources to prevent entrants from obtaining them.

Cost advantage

Lower average costs than the marginal (newest) supplier, allowing incumbents to earn profits even when entry drives market price down.

Regulatory strategies

Entry barriers created or reinforced through government rules, licenses, and intellectual-property protections.

Patent

A government-granted monopoly on selling an invention for a limited time, intended to reward innovation.

Regulatory burden

Complex or costly compliance procedures that make starting a new business difficult.

Government license

Official permission required to operate in certain industries, restricting the number of potential competitors.

Entry deterrence strategies

Actions designed to convince potential rivals that entering the market would be unprofitable.

Excess capacity

Deliberately maintaining unused production ability to signal readiness to flood the market if entry occurs.

Deep pockets

Large financial reserves that signal an incumbent’s ability to survive a prolonged price war.

Brand proliferation

Offering many similar products to fill niche segments, leaving little room for profitable entry by rivals.

Reputation for fighting

A history of aggressive responses to entry attempts, deterring potential competitors through fear.

Price war

A competitive battle in which firms cut prices—often below cost—to drive rivals out or deter entry.

Discount effect formula (∆P × Q)

The calculation of revenue lost due to lowering price: change in price times quantity receiving the discount.

Output effect formula

The extra revenue from selling one more unit, equal to the price of that additional unit.

Entry continues until zero profit

Free entry drives profits down as long as they remain positive; the process stops once profits reach zero.

Exit continues until zero profit

Free exit reduces losses as firms leave; the process stops when remaining firms break even.

Zero profit point

The point where the demand (price) curve just touches the average-cost curve, yielding zero economic profit.

Price equals average cost

Long-run condition resulting from free entry and exit: firms charge a price that matches their average cost.

Price = Average revenue = Demand

Because a firm’s demand curve shows the price buyers will pay, that same curve represents average revenue.

Positive profit entry process

Sequence in which above-zero profits attract new rivals, shifting individual firms’ demand curves left and flattening them.

Negative profit exit process

Sequence in which losses cause some firms to leave, shifting survivors’ demand curves right and steepening them.