You are a Guest | Sign In Register as: Student Plus Student
Add to Scribble Pad

Help me!!!!!!!!i want do my coursework!!!!!!!

Asked by ppikwen | May 15, 2006 | University Level > Economics > Coursework
ppikwen asks:

what the berries to entry tne monopoly? except about patents and right.

etutor answers:

A pure monopolist has 100% of the market, though in UK law a firm is regarded as a monopolist if it has over 25% of sales in a given market. Hence in practice we are looking here at oligopolistic markets where there are high concentration ratios - in other words, a small number of firms account for a large proportion of total market sales. Hence such firms tend to make large supernormal profits, and can RETAIN these profits in the long run as a result of barriers to entry. Barriers to entry raise the cost to prospective entrants (or else make it impossible for them to enter the industry). Barriers to entry have the effect of making a market less contestable

The economist Joseph Stigler defined an entry barrier as

A cost of producing (at some or every rate of output) which must be borne by a firm which seeks to enter an industry but is not borne by firms already in the industry

This emphasises the asymmetry in costs between the incumbent firm (already inside the market) and the potential entrant. If the existing businesses have managed to exploit some of the economies of scale that are available to firms in a particular industry, they have developed a cost advantage over potential entrants. They might use this advantage to cut prices (a policy of limit pricing) if and when new suppliers enter (or threaten to enter) the market, moving away from short run profit maximisation objectives but designed to inflict losses on new firms and protect their market position in the long run.

Different types of entry barriers exist

Structural barriers due to differences in costs
Strategic barriers (see below)
Statutory barriers - entry barriers given the force of law (e.g. patent protection or government awarded franchises such as the National Lottery or television and radio broadcasting licences)

Entry barriers therefore exist when costs are higher for an entrant than for the incumbent firms. Firms attempting to enter the industry will be faced with high sunk costs, and this constitutes the effective barrier to entry, as sunk costs cannot be recovered if a business decides to leave an industry. Examples include:

Capital inputs that are specific to an industry and which have little or no resale value
Money spent on advertising / marketing / research which cannot be carried forward into another market or industry (this will be all the greater as incumbent firms have the advantage of consumers' brand loyalty - this is why they persistently advertise familiar products, to reinforce this loyalty and thus making it hard for potential entrants to compete).

When sunk costs are high, a market becomes less contestable. High sunk costs (including exit costs) act as a barrier to entry of new firms (they risk making huge losses if they decide to leave a market). A good example of substantial sunk costs occurred in 2001 when British Telecom announced it was scrapping its loss-making joint venture with US telecoms firm AT&T. The closure was estimated to lead to the loss of 2,300 jobs - almost 40% of Concert's workforce. And, it cost BT $2bn (£1.4bn) in impairment charges and restructuring costs, and AT&T $5.3bn.

Strategic entry deterrence involves any move by existing firms to reinforce their position against other firms or potential rivals. This might involve hostile acquisitions; product differentiation through brand proliferation (investment in developing new products and heavy spending on marketing and advertising); capacity expansion to achieve lower unit costs, and also predatory pricing. Incumbent businesses may offer price cuts to selected customers.

Strategic barriers may be deemed anti-competitive by the British and European Union competition authorities - The EU has been particularly active in building cases against European businesses that have engaged in anti-competitive practices including price fixing cartels.

I hope these ideas are helpful.

0 student responses

Login or Register to post a response.

Student Profile

Last online Fri Jun 9 2006 11:50 AM GMT
Member since May 15, 2006
Profile type:

Popular Tags

Sponsored Links