Market structure and barriers to entry

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  • Created by: Jade
  • Created on: 17-11-12 21:21
What is market structure?
One that is used to describe the characteristics of a market
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It is concerned with the way in which products are supplied in terms of what 5 things?
Number of firms in the market. The size of firms. The strength and extent of barriers to entry and exit. The nature of the product. Whether the firm/s are price takers or price makers.
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What is a concentration ratio?
The proportion of the total market shared between the nth largest firms.
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What are the weaknesses of concentration ratios?
It does not necessarily give a true picture of actual market shares. The market share is not always split equally between the firms. Used on its own, it gives no indication of total market size.
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What is a barrier to entry?
A barrier to entry is any obstacle that deters new firms entering a market. Such barriers provide incumbent firms with a degree of market power.
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Explain why high start-up costs are a barrier to entry?
These are the costs that are necessary to start up a business. The capital required to set up a small road haulage business - modest. Starting up a new airline or TOC requires a substantial amount of capital - deters new entrants from entering.
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Why are economies of scale a barrier to entry?
Economies of scale can arise through falling long-run average costs as the scale of output increases. LRAC curve is likely to be lower than that for new entrants.
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Why are legal barriers a barrier to entry?
All types of transport operations are regulated. Buses, trains and aeroplanes have to be approved to meet particular standards, public liability insurance is mandatory and the companies involved have to obtain appropriate licenses to operate services
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Why is brand loyalty a barrier to entry?
It is invariably difficult for new firms moving into a market to establish themselves if competitors have established substantial brand loyalty among customers. They clearly stand a better chance of succeeding if the market is expanding.
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Why is intimidation a barrier to entry?
This is where an established firm seeks to stop a new entrant through veiled threats or actions that will make it clear that competition is not welcomed. There have reputably been instances of this in deregulated local bus and taxi markets.
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How is predatory pricing a barrier to entry?
This occurs when a firm deliberately charges low prices with the intention of preventing new firms from entering a market. In the short run - good for customers. Long run - firm may establish monopoly position then raise its prices.
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Why is vertical integration a barrier to entry?
Where by acquiring suppliers or distributors a firm can exclude rivals from producing a product or supplying a market
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Why are sunk costs a barrier to entry?
Sunk costs are costs incurred by a firm that it cannot recover should it leave the market. E.g. large sunk costs like advertising, can deter new entrants from the market.
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Other cards in this set

Card 2

Front

It is concerned with the way in which products are supplied in terms of what 5 things?

Back

Number of firms in the market. The size of firms. The strength and extent of barriers to entry and exit. The nature of the product. Whether the firm/s are price takers or price makers.

Card 3

Front

What is a concentration ratio?

Back

Preview of the front of card 3

Card 4

Front

What are the weaknesses of concentration ratios?

Back

Preview of the front of card 4

Card 5

Front

What is a barrier to entry?

Back

Preview of the front of card 5
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