Market Entry Barriers

What makes it difficult for potential

competitors to enter a market?
THERE ARE FOUR FACTORS
Under certain conditions.
ECONOMIES OF SCALE
SIZE
Economies of Scale
Larger fixed cost- lower average total per-unit-
cost for bigger firms.
When the assets needed for high scale
productions can be leased, transferred or
resold later without a major loss of value, this
is not a significant barrier.

Economies of Scale
Example:
Ship-building
Much of the equipment needed to produce ships is of
little use in producing other things.
The firm has to continue operating for a lengthy period
of time as long as the variable operating costs are
recoverable.

Economies of Scale
Incumbents are hard to overthrow.
Competitors need massive investments and a long
period of recovery. They might want to think this
out.
The incumbent firm becomes the dominant firm,
and if it captures the market, the cost advantages
that comes from it size will protect it from its
rivals.
Control over an Essential
Resource
Greedy is Good
Control over an Essential Resource
Control over an essential resource gives a firm
the upper hand.
Resource monopolies are seldom complete.
Other firms are challenged to find their way into
the markets.
Search for mineral deposits.
New technologies.
Substitute resources.
Control over an Essential Resource
It may be a temporary barrier but it may be
enough to limit entry for only one seller.
Government Licensing and other
Legal Barriers to Entry
License Please?
Government Licensing and other Legal
Barriers to Entry
Non-payment of tax does not render a
business illegal, but non-payment of license
fees shall result into civil and criminal
persecutions.

Government Licensing and other Legal
Barriers to Entry
What does licensing mean?
Is a requirement that one obtains permission from
the government in order to perform certain
business activities or work in various occupations.
Sometimes, licenses are of low cost, SOMETIMES.
OFTEN, they are costly and a major deterrent to
the entry of rivals.
Government Licensing and other Legal
Barriers to Entry
Legal Barriers
Oldest and most effective method of business firm
from potential competitors.
Government Licensing and other Legal
Barriers to Entry
What are the examples of this legal
barriers?
Tariffs
Exclusive Rights
Patents
Reg. Phil. Pat.
Patents
Everyone needs protection. Especially a
companys genuine product. That is why
patent protection was created.
A company seeking profit exerts effort to
engage in research and new products.
High Barriers to Market Entry
Their critics- The Economists
High Barriers to Market Entry
The discipline to producers are weakened.
Reduced Competition results in allocative
inefficiencies.
High Barriers to Market Entry
Unregulated monopolists or oligopolistic
groups can often gain by restricting output
and raising price.
High Barriers to Market Entry
The rent-seeking costs related to getting and
keeping monopoly power add to the welfare
losses resulting from allocative inefficiencies.
High Barriers-Solutions
Let them in
Solutions
Control the structure of the industry to ensure
the presence of rival firms.
Reduce artificial barriers that limit
competition.
Regulate the price and output of firms in the
market.
Supply NFA rice.- Supply the market with
goods produced by a government firm.
Monopoly
Its all mine
Monopoly
Single Seller

No good substitute. MERALCO
High barrier to the entry of any other firms.

Monopoly
A profit-maximizing monopolists will lower
price and expand its output as long as
marginal revenue exceeds marginal cost as the
maximum-profit output MR will equal MC.
The monopolist will charge demand curve
consistent with that output.
Monopoly
Sometimes, demand and cost condition will be
such than even will be such than even a
monopolist will be unable to earn economic
profit.
A monopolist seldom calculates demand,
marginal revenue and other cost curves.
It is difficult for a monopolist to predict demand
conditions and consumer response to quality and
price changes. The profit maximizing price.
Oligopoly
Together
Oligopoly
Few Sellers
Small number of rival firms
Interdependence among the sellers because each
is large relative to the size of the market.
Substantial economies of scale
High entry barriers to the market
Interdependence among Oligopolistic
Firms
A firm that is deciding what price to charge,
output to produce, or quality of product to
offer must consider not only substitutes, but
also potential reactions of rival producers.

Substantial Economies of Scale
Large Scale production is required to achieve
minimum average costs.
There is a small number of firms which means
that those firms must engage in large
productions to meet demand.
Significant Barriers to Entry
As with monopoly, barriers to entry also exist
in oligopoly.
Economies of scale is the most significant
barrier to entry.
The option of small start is not available to
potential competitors, thus giving the existing
oligopolists the chance to eliminate
competitors before they grow.
Significant Barriers to Entry
Other Factors:
Patent Rights
Control over an essential resource
Government-imposed restraints
Oligopoly
When firms produce identical products, like
milk or gasoline, there is less opportunity for
non-price competition.
On the contrary, if differentiated products are
produced, they are more likely to use style,
quality, and advertising as competitive
weapons.
Each firm attempts to convince buyers that
other products are poor substitutes.
Price and Output under oligopoly
An oligopolist cannot determine the price that
will deliver maximum profit simply by
estimating its own costs and the existing
market demand.
The demand facing an oligopolistic form
depends also on the pricing behavior of its
close rivals.