Questions and Answers
Define 'barriers to entry'.
These are blockages put in place that are designed to block potential entrants from entering a market profitably.
Define 'barriers to exit'.
Any obstacle/obstruction in place that may stop firms from leaving an industry.
Define 'contestable market'.
This is a market that has very low barriers to entry and exit and the cost to new firms is the same as incumbent firms.
Define 'sunk costs'.
Signup and view all the answers
Explain 8 examples of barriers to entry.
Signup and view all the answers
Explain 5 examples of barriers to exit.
Signup and view all the answers
Define 'goodwill'.
Signup and view all the answers
What is a perfectly contestable market?
Signup and view all the answers
Is a perfectly contestable market possible in reality?
Signup and view all the answers
What is meant by 'hit-and-run entry'?
Signup and view all the answers
Study Notes
Barriers to Entry and Exit
- Barriers to entry block potential new entrants from profitably entering a market.
- Barriers to exit obstruct firms from leaving an industry, creating challenges for businesses that wish to withdraw.
Contestable Markets
- Contestable markets feature low barriers to entry and exit, where the cost structure for new firms equals that of incumbent firms.
- Perfectly contestable markets do not exist in reality; real-world markets vary in degrees of contestability.
Sunk Costs
- Sunk costs are non-recoverable expenses if a business exits an industry, discouraging firms from leaving.
- Examples include industry-specific capital inputs and non-transferable marketing expenditures.
Examples of Barriers to Entry
- Patents: Provide exclusive rights to inventors, limiting competition.
- Limit-pricing: Established firms may lower prices to levels that push new entrants into losses.
- Cost advantages: Incumbent firms benefit from operational experience, allowing for lower pricing and competitive flexibility.
- Advertising and marketing: Strong brand loyalty makes market entry costly for newcomers, especially in industries like cosmetics and automotive.
- R&D Expenditure: High investment in research and development can deter new entrants due to competitive advantages gained by existing firms.
- Presence of Sunk Costs: High initial costs and the risk of unrecoverable investments reduce the attractiveness of market entry.
- International Trade Restrictions: Tariffs and quotas can protect domestic industries, creating barriers for foreign competitors.
- Economies of Scale: Larger firms lower production costs, making it challenging for smaller entrants to compete effectively.
Examples of Barriers to Exit
- Asset-write-offs: Costs related to the disposal of fixed assets, stocks, and brand goodwill can discourage exit.
- Closure Costs: Includes redundancy payments and penalties linked to terminating leases and contracts.
- Loss of Business Reputation: Exiting can harm future consumer goodwill and reputation in the industry.
- Market Downturn Perception: Temporary downturns may tempt firms to stay in the market, hoping for recovery rather than losing investments.
- Sunk Costs: Non-recoverable costs act as a deterrent against leaving the market, entrenching firms in less favorable conditions.
Goodwill
- Goodwill refers to a business's established reputation, seen as a quantifiable asset when evaluating its sale price.
Hit-and-Run Entry
- Describes a strategy where firms temporarily enter a contestable market to capture short-term profits before rapidly exiting.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Description
This quiz delves into the concepts of barriers to entry and exit in market structures. It covers contestable markets, the significance of sunk costs, and various examples illustrating how incumbents maintain competitive advantages. Test your understanding of these essential economic principles.