Barriers to Entry Flashcards
(7 cards)
What are some characteristics of contestable markets?
They face actual and potential conpetition.
Low customer loyalty.
The number of firms in the market varies.
What do barriers of entry do?
They aim to block new entrants into the market, it increases producer surplus and reduces contestability.
How do economies of scale act as a barrier to entry?
The more economies of scale that a firm uses, the less likely it is that a new firm will enter the market as they will be unable to compete on the price of raw materials.
How do legal barriers act as a barrier to entry?
Patents and exclusive rights to production mean other firms will be unable to enter the market.
Some firms require a licences to operate which causes a barrier as new firms will have to get the licence first.
How can customer loyalty and branding act as a barrier to entry?
It can make a market less competetive as demand becomes more price inelastic and consumers are less likely to leave for other brands.
How can predatory pricing act as a barrier to entry?
Setting low prices to drive out firms already established in the market.
How can limit pricing act as a barrier to entry?
It ensures the price of a good is below that which a new firm entering the market would be able to sustain
