Barriers to Entry Flashcards

Study Notes

Barriers to Entry

Barriers to entry are obstacles that prevent new entrants from profitably entering a market.
Examples include legal restrictions, high startup costs, and established brand loyalty.

Barriers to Exit

Barriers to exit are obstacles that prevent firms from leaving an industry.
High sunk costs and reputational damage are common barriers.

Contestable Market

A contestable market features low barriers to both entry and exit.
New firms face the same costs as established firms, promoting competitive conditions.

Sunk Costs

Sunk costs are expenses that cannot be recovered if a business exits an industry.
Examples include specialized equipment and non-transferable marketing expenditures.

Examples of Barriers to Entry

Patents: Grant exclusive rights to inventors, blocking competitors from using their inventions.
Limit-pricing: Incumbent firms may reduce prices to unsustainable levels for new entrants.
Cost Advantages: Established firms benefit from lower production costs through economies of scale.
Advertising: Strong branding creates consumer loyalty, making market entry costly for newcomers.
R&D Expenditure: Heavy investment in research can deter new firms due to increased competitiveness of incumbents.
Sunk Costs Presence: High fixed costs discourage entry, particularly if they are unrecoverable.
International Trade Restrictions: Tariffs and quotas can protect domestic markets from foreign competition.
Economies of Scale: Larger firms can produce at lower costs, disadvantaging smaller entrants.

Examples of Barriers to Exit

Asset Write-offs: Costs associated with disposing of fixed assets can hinder exit decisions.
Closure Costs: Expenses related to layoffs and contracts may deter firms from leaving.
Loss of Goodwill: Departing from a market can damage a firm's reputation and customer relationships.
Market Downturn: Firms may resist leaving during temporary economic declines in hopes of recovery.
Sunk Costs: Non-recoverable expenses discourage firms from exiting, leading to potential losses.

Goodwill

Goodwill refers to a business's reputation and value perceived by customers, contributing to its overall valuation.

Perfectly Contestable Market

A perfectly contestable market has no barriers to entry or exit, allowing incumbents and new firms to compete on equal footing.

Reality of Contestable Markets

Perfectly contestable markets do not exist in practice; various industries exhibit differing levels of contestability.
Examples include fast food markets (highly contestable) versus motor car industries (less contestable).

Hit-and-Run Entry

Hit-and-run entry is a strategy where firms briefly enter a market to capitalize on excess profits, exiting quickly.
This approach relies on the contestable nature of the market for successful exploitation.

Description

Explore key concepts related to market dynamics with this flashcard quiz on barriers to entry and exit. Understand the definitions and implications of contestable markets and the obstacles firms face. Ideal for students of economics looking to grasp these fundamental terms.