Monopoly Entry Barriers
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Transcript of Monopoly Entry Barriers
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Monopoly and Barriers to Entry
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Long Run: Barriers to Entry Barriers to entry are designed to block potential
entrants from entering a market profitably They seek to protect the monopoly power of existing
firms and therefore maintain supernormal profits in
the long run Barriers to entry make a market less contestable
i.e. they affect market structure in the long run
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Types of Entry Barrier (1) (1) Structural barriers (or Innocent Barriers) due to differences in
production costs and being in the market for some time
Economies of scale (e.g. Natural monopoly)
Vertical integration (e.g. Backwards and forwards)
Control of essential resources e.g. technologies / commodities
Expertise and reputation of the incumbent Brand loyalty
Inherent suspicion among consumers about new ideas
(2) Strategic barriers
Predatory pricing / limit pricing
Marketing / product differentiation
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Types of Entry Barrier (2) (3) Statutory (legal) barriers - entry barriers given force of law
Licences (e.g. Professional qualifications) Patents
Copyrights
Public franchises Tariffs, quotas and other trade restrictions
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Protecting Monopoly
Power through Patents
Patents
Government enforced property rights
Generally valid for 12-20 years theygive the owner an exclusive right to
prevent others from using patented
, ,
A patent should protect yourintellectual property.
Patent licences can be sold to otherproducers
Designed to encourage innovation andinvention
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Integration and Pricing Tactics Vertical Integration
Control over supply chain anddistribution
Limit Pricing and Predatory Pricing
Predatory pricing involvesower ng pr ces to a eve t at
would force new entrants tooperate at a loss (price < averagecost)
Sacrificing some short termprofits but to restore andmaintain supernormal profits inthe long run
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Cost Advantages and
Marketing/Branding Absolute cost advantages
Lower costs (e.g. economies of
scale) - allows the existingmonopolist to cut prices and winprice wars
Advertising and Marketing Developing consumer loyalty by
SAC1
AC
establishing branded productscan make successful entry intothe market by new firms moreexpensive
Brand Proliferation Brand proliferation disguises from
consumers the actualconcentration in markets such asdetergents, confectionery andhousehold goods.
LRAC
SAC2
SAC3
Output
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Barriers to Exit Barriers to exit increase the intensity of competition in a market because
existing firms stay and fight
There are costs associated with exiting an industry
(1) Asset-write-offs
E.G. plant and machinery, stocks and goodwill
(2) Closure costs Redundancy costs, contract contingencies with suppliers
Penalty costs from ending leasing arrangements for property
(3) Lost reputation
Lost goodwill, damage to the brand
Sunk costs are costs incurred when entering a market that areirrecoverable should a firm decide to leave the market
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Cereal Barriers What are the entry barriers for
new businesses and productsin the breakfast cereal market?
How does a firm like Kelloggsprotect its market position in
the long term? Give some examples of
product innovation in thecereal market in recent years
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