theme 3 : barriers to entry

what are barriers to entry designed for

to block potential entrants from entering a market profitably

why do barriers to entry seek to do

seek to protect the monopoly power of existing (incumbent - currently in the market) firms in an industry and therefore maintain supernormal profits in the long run

5 examples of barriers to entry

• patents

• cost advantages

• advertising and marketing

• research and development expenditure

• sunk costs

patents explanation

• giving the firm the legal protection to produce a patented product for a number of years

• trademark - logos / brands

• copy write - words

cost advantages explanation

• lower costs, perhaps through experience of being in the market for some time, allows the existing monopolist to cut prices and win price wars

advertising and marketing

• big barrier to entry

• developing consumer loyalty by establishing branded products can make successful entry into the market by new firms much more expensive

• is particularly important in markets such as domestics, confectionary and the motor car industry

research and development explanation

• heavy spending on research and development can act as a strong deterrent to potential entrants to an industry

• clearly much research and development spending goes on developing new products (patents)

sunk costs explanation

• sunk costs are costs that cannot be recovered if a business decides to leave an industry

• examples include capital inputs that are specific to a particular industry and which have little or no resale value

• money spent on advertising / marketing / research which cannot be carried forward into another market or industry