Lecture notes 4.1.2 Barriers to entry

4.1.2 Barriers to entry

 Barriers that stop firms entering markets
 Characteristics of contestable markets:
o Face actual and potential competition
o Free access to production techniques and technology
o No significant entry or exit barriers
o Low consumer loyalty
o Number of firms in market varies
 Implications of contestable markets on firms' behaviour
o Firms are allocatively efficient
o Operate at bottom of average cost curve
o Firms are predictably efficient
o Low barriers to entry provide easy access to market
o Firms enter market make supernormal profits and leave
 Hit and run competition
o Highly competitive markets are perfectly competitive
o Supernormal profits short term
o Normal profits in long term
o However, in practice firms can only make normal profits
 It is the only way to prevent competition
 Without supernormal profits there Is no incentive for competition
 Types of barriers to entry
o Block new entrants into the market
o Greater the economies of scale
 Less likely a firm enters the market
o Legal barriers
 Patents an exclusive right to production
 Need a licence to operate in some markets
 Taxi
 Pub
o Consumer loyalty
 Price inelastic demand
 Consumers will buy their favourite regardless of cost
o Predatory pricing
 Large firms set prices so low so that it drives other firms out of the market
 Short term leads to them making a loss
 Reduces contestability
o Limit pricing
 Put a price lower than other firms can afford to have so they make profits, but
new firms can't
o Anti-competitive practices
 Illegal
 Suppliers don’t supply some market competitors