Barriers to entry

Barriers to entry

1. Contestability

   • If starting a business is easy, the market is contestable.
   • Contestable markets can stop businesses abusing monopoly power, as there is always potential for new competitors.
   • Regulators such as the CMA and OFGEM aim to reduce barriers to entry

2. Legal barriers to entry

   • Three main examples: patents, heavy regulation, public sector monopolies
     • Natural monopolies have barriers to entry which are impossible to scale
   • Also intellectual property rights, which can be bought and sold
   • Regulatory barriers often to protect consumers, i.e needing a licence to be a dentist

3. Natural barriers to entry

   • Natural monopolies exist where duplication is expensive or impractical (i.e railways)
     • Internal economies of scale can be so intensive that there is little room for competition
   • It is not just limited to government-run monopolies, i.e it would be very difficult to start up a car firm and compete with existing ones
   • Economies of scale

4. Internal economies of scale

   • Technical - when an improvement in productivity is less than the corresponding rise in cost
     • Marketing - large scale advertising reducing costs
       • Risk-bearing - conglomerates can move profits to 'subsidise' an unsuccessful arm of the firm
         • Managerial - large firms can hire specialists in human resources etc.
           • Purchasing - bulk-buying
             • Financial - lower borrowing costs for big firms (seen as less risky)

5. Artificial barriers to entry

   • Product differentiation
     • To get noticed in a monopolistic market, a new firm will have to differentiate their product and make it superior to existing ones
       • R&D costs to develop unique product
     • If differentiation is based on marketing and brand image, any expenditure will be a sunk cost
   • Branding
     • In many cases, such as Google, brand names become synonymous with the product.
     • Many companies try to increase brand loyalty through loyalty schemes (i.e Clubcards)
   • Spreading risks in R&D and new technologies
     • In industries where being successful depends on successful R&D, such as pharmaceuticals, spread risks, accepting some projects may not be successful
       • Scientists also want to channel work through big firms, which are seen as more competent
   • Vertical integration
     • When producers own retail outlets, life is made difficult for independent retailers and rival producers.
     • Retailers in competition with producer-owned ones have very weak bargaining power
     • Even without integration, large firms can negotiate exclusive contracts with suppliers or retailers, i.e car markets giving exclusive rights to dealers in a specific area
   • Predatory and limit pricing
     • If there is the possibility of predatory pricing by large firms, potential entrants are deterred
     • Regulators' efforts to stop it are often unsuccessful

6. The impact of barriers to entry on market structure

   • An extensive range of barriers to entry can cause imperfect competiton
   • X-inefficiency may occur when a firm has no incentive to reduce costs
   • Regulators can limit exploitation by privatised monopolies with price controls
   • Globalisation has created global oligopolies
   • Suppliers often focus less on branding, so there is more price competition
   • Labour intensive markets are often very competitive, although economies of scale can still create large producers