Monopoly and Barriers to Entry
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
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
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
Protecting Monopoly
Power through Patents
• Patents
– Government enforced property rights
– Generally valid for 12-20 years – they
give the owner an exclusive right to
prevent others from using patented
products, inventions, or processes
– A patent should protect your
‘intellectual property’.
– Patent licences can be sold to other
producers
– Designed to encourage innovation and
invention
Integration and Pricing Tactics
• Vertical Integration
– Control over supply chain and
distribution
• Limit Pricing and Predatory Pricing
– Predatory pricing involves
lowering prices to a level that
would force new entrants to
operate at a loss (price < average
cost)
– Sacrificing some short term
profits but to restore and
maintain supernormal profits in
the long run
Cost Advantages and
Marketing/Branding
• Absolute cost advantages
AC
– Lower costs (e.g. economies of
scale) - allows the existing
monopolist to cut prices and win SAC1
price wars
• Advertising and Marketing
– Developing consumer loyalty by
establishing branded products SAC2
can make successful entry into
the market by new firms more SAC3
expensive
• Brand Proliferation
– Brand proliferation disguises from LRAC
consumers the actual
concentration in markets such as
detergents, confectionery and
household goods. Output
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 are
irrecoverable should a firm decide to leave the market
Reducing entry barriers
• Technological change in markets
– E.g. impact of e-commerce in
many markets
– Impact of disruptive technologies
• Removal of statutory entry barriers
– e.g. the liberalisation of markets
– Utilities
• Postal services
• Electricity
• Gas
– Banking / Finance
• Globalisation of markets
– Emergence of foreign competition
Cereal Barriers
• What are the entry barriers for
new businesses and products
in the breakfast cereal market?
• How does a firm like Kellogg’s
protect its market position in
the long term?
• Give some examples of
product innovation in the
cereal market in recent years
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