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Monopoly Barriers to Entry
Barriers to entry are designed to block potential entrants from entering a market. They seek
to protect the monopoly power of existing firms in an industry and therefore maintain
profits in the long run.
This most commonly arises because there are substantial economies of scale being
collected by existing firms. This will act as a barrier to entry because any new firm entering
the market is likely to produce less therefore have much higher average costs than the few
established producers. For example, South west water - would it be worth another water
company building another network of water
pipes to compete with the existing company?
No, because if they only got a small share of
the market, the average cost would be very
high and they would go out of business. This
is an example of a natural monopoly.
Limit pricing is a barrier to entry because it keeps new entrants out of the industry as if
they only earn normal profits; new firms will not be attracted into the industry. The
strategy helps the firm to maximise long term profits; it is better to accept lower profits in
the short run to preserve profit in the long run.
Legal barriers may give firms particular advantages. Patent laws can prevent competitor
firms from making a product for a given number of years after its invention. The government
may give firm exclusive rights to production or it may make
nationalised industries into monopolies by legally forbidding
private firms to set up in the industry, as was the case with
the Post Office in the UK. However in 2006, royal mail lost
its monopoly status however it still has the most market
share with 30%.
Existing firms in an industry may be able to erect very high barriers through high spending on
advertising and marketing. The purpose of these is to make consumers associate a
particular type of good with the firm's
product, creating a powerful brand image,
for example coca cola. It would be
extremely hard to enter this market as
people have a lot of brand loyalty towards
coca cola. However Coca Cola is not a
monopoly as it has other competitors for example Pepsi.
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High capital costs are a very important barrier to
entry which is used in many industries. Entry costs
to these industries can be very high and only large
companies on the whole can pay them. For
example car manufacturers e.g.…read more