Unit 4.4: 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 in an
industry.
So how are firms protected from (new) competitors?
Consider each of these examples below and suggest how you think the existing
firm(s) are protected (or could be protected) from new entrants.
1. Existing firms in the petrochemical industry (BP, Shell, Exxon-Mobil etc) are
concerned about a potential new petrol retailer ‘PetroHead’ entering the
European market.
2. Astra-Zenca has developed a new breakthrough drug for the treatment of
heart disease and wants to ensure other firms don’t copy its product.
3. Adidias, Reebok, Nike, Puma etc are concerned about a potential new entrant
‘Bolt’ in the running shoes market.
4. Existing electricity generator firms are concerned about a new start-up
company ‘Nu-Clear’ in the UK electricity market
5. British Airways, Virgin Atlantic, Delta and American Airlines are threatened
by a new airline ‘Fly Atlantic’ setting up on the very profitable London-New
York route.
Barriers to Entry
Artificial barriers to entry may be used by a monopoly (or other large firms) to
restrict competition unfairly by:
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using _________________ pricing to force rivals out of business
threatening major suppliers that it will stop buying from them if they supply
rival firms
threatening retailers to stop supplying them with their product if they stock
rival products
Natural barriers to entry occur because large-scale production is often more
efficient. Smaller firms may be unable to compete with larger firms on costs and
revenues because:
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large firms may enjoy significant ______________ of scale that give them lower
average costs and more competitive prices
small firms cannot match the capital investment needed for large-scale
production
large firms may have built up significant customer loyalty over time
some large firms may have a legal monopoly because they have ______________
to protect their innovative products and technologies from being copied