Managerial Economics Exam questions
Barriers to entry:
In theories of competition in economics, barriers to entry are the obstacles and hindrances that make it difficult for a company to enter a given market or industry. The most common barriers to entry include government regulation and economies of scale, but nowadays it is increasing for entry barriers to be viewed as a cost. Stigler defined barriers to entry as “A cost of producing which must be borne by a firm which seeks to enter an industry but is not borne by firms already in the industry”. Therefore, these invisible shields protect incumbent firms and reduce competition within the market, which can often lead to market power and the existence of a monopoly.
Barriers to entry are one of the key aspects in Porter's five forces analysis, which is a framework for industry analysis and business strategy development based on the competitive intensity and therefore attractiveness of a market. Different barriers will effect companies in different ways, to understand their impacts they are grouped into 3 categories known as consumer preference barriers, absolute cost advantages and scale economies. Preference and cost advantage barriers are present if established firms have lower average unit costs than potential entrants at any given output level. This makes entry expensive for entrants as they have to spend more on advertising and research and development in order to try and create a competitive advantage. To overcome absolute cost advantages entrants have to pay higher prices for inputs, this may be due to economies of scale or due to existing firms owning or controlling the supply of scarce resources. Scale economy barriers exist when declining LRAC for the product in question makes it difficult for smaller firm to enter the market.
Perfectly competitive markets are said to have 0, or low, barriers to entry compared to monopoly industries which have very high barriers. It is possible for monopolies to own patents and intellectual property
In theories of competition in economics, barriers to entry are the obstacles and hindrances that make it difficult for a company to enter a given market or industry. The most common barriers to entry include government regulation and economies of scale, but nowadays it is increasing for entry barriers to be viewed as a cost. Stigler defined barriers to entry as “A cost of producing which must be borne by a firm which seeks to enter an industry but is not borne by firms already in the industry”. Therefore, these invisible shields protect incumbent firms and reduce competition within the market, which can often lead to market power and the existence of a monopoly.
Barriers to entry are one of the key aspects in Porter's five forces analysis, which is a framework for industry analysis and business strategy development based on the competitive intensity and therefore attractiveness of a market. Different barriers will effect companies in different ways, to understand their impacts they are grouped into 3 categories known as consumer preference barriers, absolute cost advantages and scale economies. Preference and cost advantage barriers are present if established firms have lower average unit costs than potential entrants at any given output level. This makes entry expensive for entrants as they have to spend more on advertising and research and development in order to try and create a competitive advantage. To overcome absolute cost advantages entrants have to pay higher prices for inputs, this may be due to economies of scale or due to existing firms owning or controlling the supply of scarce resources. Scale economy barriers exist when declining LRAC for the product in question makes it difficult for smaller firm to enter the market.
Perfectly competitive markets are said to have 0, or low, barriers to entry compared to monopoly industries which have very high barriers. It is possible for monopolies to own patents and intellectual property