Unit 3 Barriers to entry


Terms in this set (...)

How is Capital costs a barrier to entry?
Buying a car plant or alimunium smelter is extremely expensive and entry costs to these industries are high which means only large companies can pay them
How are sunk costs a barrier to entry?
-costs which are not recoverable
-costs that won't be able to get any of the money back from advertising for example as well as the difference between the purchase price and the resale price of the capital equipment would be sunk costs
Economies of scale
-firms operating at lowest AC can satisfy all the demand of the buyers
-any new firm entering the market is likely to produce less and therefore have much higher AC that the few established producers
Natural costs advantages
-some firms possess advantages because they own factors of production which are superior to others
-for example a peterol station on a main busy road is likely to be superior to one in a sleepy country village
-as a result they will either be able to produce at a lower cost or be able to generate higher revenues that their potential competitors
Legal barriers
Patent laws can prevent competitor firms from making a product for a given number of years after its invention
Marketing barriers
Existing firms might be able to erect very high barriers to entry through high spending on advertising and marketing
-the purpose of these is to make consumers associate a particular type of good with the firms product creating strong brand loyalty
Limit pricing
-firms may choose to set lower prices than they would charge if they maximised their short run profits to keep new entrants out
-if they only earn normal profits then firms then new firms will not be attracted into the industry
Anti-competitive practises
-Firms may deliberately restrict competition through methods such as a manufacturer refusing to sell goods to a retailer which stocks the products of a competitor firm