Monopoly and Barriers to Entry 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 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 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 Protecting Monopoly Power through Patents • Patents – Government enforced property rights – Generally valid for 12-20 years – they give the owner an exclusive right to prevent others from using patented products, inventions, or processes – A patent should protect your ‘intellectual property’. – Patent licences can be sold to other producers – Designed to encourage innovation and invention Integration and Pricing Tactics • Vertical Integration – Control over supply chain and distribution • Limit Pricing and Predatory Pricing – Predatory pricing involves lowering prices to a level that would force new entrants to operate at a loss (price < average cost) – Sacrificing some short term profits but to restore and maintain supernormal profits in the long run Cost Advantages and Marketing/Branding • • • Absolute cost advantages – Lower costs (e.g. economies of scale) - allows the existing monopolist to cut prices and win price wars Advertising and Marketing – Developing consumer loyalty by establishing branded products can make successful entry into the market by new firms more expensive 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 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 are irrecoverable should a firm decide to leave the market Reducing entry barriers • Technological change in markets – E.g. impact of e-commerce in many markets – Impact of disruptive technologies • Removal of statutory entry barriers – e.g. the liberalisation of markets – Utilities • Postal services • Electricity • Gas – Banking / Finance • Globalisation of markets – Emergence of foreign competition Cereal Barriers • What are the entry barriers for new businesses and products in the breakfast cereal market? • How does a firm like Kellogg’s protect its market position in the long term? • Give some examples of product innovation in the cereal market in recent years Keep up-to-date with economics, resources, quizzes and worksheets for your economics course.