Barriers to entry and Exit Year 7 Micro (10)

Barriers to entry?

Any obstacle that prevents a new firm entering a market. Lloyds TSB (Legal, Technical, Strategic, Brand Loyalty)

Legal Barrier?

1) Patents: Sole ownership of something you have created, no one can copy you. So more patent issues mean less firms can come in

2) Licences/Permits: If all of these have been given out you cant enter and also very expensive to obtain

3) Standard and regulations: health standard, product standard, environmental standard, means its costly for firms and puts them off. Regulation like pollution, minimum wages etc if strict.

4) Insurance

Technical Barriers?

Barriers to do within the industry

1) Start up costs

2) Sunk costs: costs that cant be recovered when a from leaves the market, e.g. advertising, and specialist machinery (cant sell it on).

3) Economies of scale: Firms have high economies of scale, (very low average costs) this might scare off firms as they cant get that economies of scale straight away

4) Natural Monopoly: One firm to operate in market.

Strategic barriers?

Firms in the market already known as incumbent firms, act in a very threatening way.

1) Predatory pricing: pricing lower on purpose to drive out competition

2) Limit pricing: firms break even or normal profit to limit competition into market

3) Heavy Advertising

Brand Loyalty?

Loyal to different businesses makes firms think they wont be able to compete

Barriers to exit?

Any obstacle that prevents a firm from leaving a market.

What are some of the barriers to exit?

1) Under valuation of assets: Originally assets bought an then when you try to leave the price is lower so you hold on.

2) Redundancy costs: Cost you have to pay to workers due to shutting down. If high then you might stay for longer.

3) Penalties for leaving contracts early: Contract with supplier, rent and then penalties can be given

4) Sunk costs: might want you to stay for longer.