Monopoly and Barriers to Entry
Barriers to entry and exit
• Block potential entrants from making a profit
• Protect the monopoly power of existing firms
• Maintain supernormal profits in the long run
• Barriers to entry make a market less contestable
Types of Entry Barrier
• (1) Structural barriers
– Economies of scale (consider a natural monopoly)
– Vertical integration (backwards and forwards)
– Control of important technologies / commodities
– Expertise and reputation of the incumbent
– Brand loyalty and brand proliferation
– Inherent suspicion among consumers about new ideas
• (2) Strategic barriers
– Predatory pricing / limit pricing
– Heavy marketing spending / product differentiation
Types of Entry Barrier
• (3) Statutory (legal) barriers
– Licences (e.g. professional qualifications, banking licences, licences to sell alcohol, taxis, run a night club or a casino)
– Patents (e.g. In the pharmaceutical industry and in telecommunications)
– Copyrights and Trademarks
– Public franchises e.g. Rail franchises, national lottery
– Tariffs, quotas and other trade restrictions affecting imports of goods and services
Licences in Action
Barriers to Entry in the Taxi Market
Patent Protection in a Market
• Patents
– Offers legal protection of property rights – Generally valid for 12-­‐20 years
– Give the owner an exclusive right to prevent others from using patented products, inventions, or processes
– Allows protection of intellectual property
– If a company successfully sues another it can demand a sales ban of its competitor's products, or force the loser to pay expensive licence fees.
Patent protection / patent wars
2012 – Many patent battles in digital industries
Discovering the IP in an iPhone
http://www.bbc.co.uk/news/technology-­17040699
Cost Advantages and Marketing/Branding
• Absolute cost advantages
– E.g. economies of scale
– Lower unit costs for an established business
• Advertising and Marketing
– Establishing branded products
– Makes demand less elastic
– Lowers cross price elasticity • Brand Proliferation
– Brand proliferation disguises from consumers the actual concentration in markets such as detergents, confectionery and household goods.
AC
SAC1
SAC2
SAC3
LRAC
Output
Economies of scale, the size of market demand and entry barriers
Price, Cost
SAC1
SAC2
Demand AR
(industry)
SAC3
Minimum efficient scale is high % of market demand
Output (Q)
In contrast .......
Demand (industry)
Price, Cost
LRAC (firm)
200
Output (Q)
1000
In contrast .......
Demand (industry)
Price, Cost
Low MES –
scope for greater market competition
LRAC (firm)
200
Here the MES is a smaller % of industry demand
Output (Q)
1000
Barriers to Exit
• Costs associated with exiting an industry
• (1) Asset-­‐write-­‐offs
– E.G. plant and machinery, stocks
• (2) Closure costs
– Redundancy costs, contracts with suppliers
– Penalty costs from ending leasing arrangements
• (3) Lost reputation
– Lost goodwill, damage to the brand
• Sunk costs are costs incurred when entering a market that are irrecoverable should a firm decide to leave
Reducing entry barriers
• Technological change in markets –
e.g. impact of disruptive technologies
• Removal of statutory barriers –
market liberalisation
• Globalisation of markets – increasing competition