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Monopoly and Barriers to Entry

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Long Run: Barriers to Entry Barriers to entry are designed to block potential

entrants from entering a market profitably They seek to protect the monopoly power of existing

firms and therefore maintain supernormal profits in

the long run Barriers to entry make a market less contestable

i.e. they affect market structure in the long run

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Types of Entry Barrier (1) (1) Structural barriers (or Innocent Barriers) due to differences in

production costs and being in the market for some time

Economies of scale (e.g. Natural monopoly)

Vertical integration (e.g. Backwards and forwards)

Control of essential resources e.g. technologies / commodities

Expertise and reputation of the incumbent Brand loyalty

Inherent suspicion among consumers about new ideas

(2) Strategic barriers

Predatory pricing / limit pricing

Marketing / product differentiation

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Types of Entry Barrier (2) (3) Statutory (legal) barriers - entry barriers given force of law

Licences (e.g. Professional qualifications) Patents

Copyrights

Public franchises Tariffs, quotas and other trade restrictions

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Protecting Monopoly

Power through Patents

Patents

Government enforced property rights

Generally valid for 12-20 years theygive the owner an exclusive right to

prevent others from using patented

, ,

A patent should protect yourintellectual property.

Patent licences can be sold to otherproducers

Designed to encourage innovation andinvention

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Integration and Pricing Tactics Vertical Integration

Control over supply chain anddistribution

Limit Pricing and Predatory Pricing

Predatory pricing involvesower ng pr ces to a eve t at

would force new entrants tooperate at a loss (price < averagecost)

Sacrificing some short termprofits but to restore andmaintain supernormal profits inthe long run

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Cost Advantages and

Marketing/Branding Absolute cost advantages

Lower costs (e.g. economies of

scale) - allows the existingmonopolist to cut prices and winprice wars

Advertising and Marketing Developing consumer loyalty by

SAC1

AC

establishing branded productscan make successful entry intothe market by new firms moreexpensive

Brand Proliferation Brand proliferation disguises from

consumers the actualconcentration in markets such asdetergents, confectionery andhousehold goods.

LRAC

SAC2

SAC3

Output

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Barriers to Exit Barriers to exit increase the intensity of competition in a market because

existing firms stay and fight

There are costs associated with exiting an industry

(1) Asset-write-offs

E.G. plant and machinery, stocks and goodwill

(2) Closure costs Redundancy costs, contract contingencies with suppliers

Penalty costs from ending leasing arrangements for property

(3) Lost reputation

Lost goodwill, damage to the brand

Sunk costs are costs incurred when entering a market that areirrecoverable should a firm decide to leave the market

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Cereal Barriers What are the entry barriers for

new businesses and productsin the breakfast cereal market?

How does a firm like Kelloggsprotect its market position in

the long term? Give some examples of

product innovation in thecereal market in recent years

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