|
There
are a number of different factors that will prevent a firm entering any
particular industry.
Capital costs
Buying a
shop is relatively cheap, therefore entering most forms of retailing is easy.
Buying an oil rig or a car production plant requires a substantial capital
investment, entry costs into such industries can only be met by large
companies. These capital costs, which vary from industry to industry, are an
important barrier to entry.
Sunk costs
Sunk
costs are those that aren't recoverable, e.g., the difference between the
purchase price and the resale price of capital equipment and the costs of
advertising. High sunk costs will act as a barrier to entry as the cost of
failure is so great. Conversely low sunk costs will encourage forms to enter
an industry, as they will have little to lose.
Scale economies
In
some industries the minimum efficient scale (MES) is very large and it takes
many years to reach that level of output. Existing firms who have the lower
costs would be able to win any price war against a new entrant.
Patents
The
government assigns patents to the owner of a particular idea or invention for
17-20 years, they legally prevent other firms producing or using something
that is patented, e.g., catseyes, Dyson vacuum cleaners.
Government licences
Prevent
other firms from providing a good or service, e.g., commercial television and
radio, the national lottery, delivery of letters by Royal Mail and the
production of nuclear energy.
Marketing barriers
Marketing
can lead to barriers to entry, as huge spending by firms leads to consumer
loyalty. New entrants have to at least match this level of advertising if
they wish to persuade consumers to buy their product, e.g., soap powders are
produced cheaply using a low level of technology, therefore existing firms
advertise heavily so that any new entrant would have to spend an estimated £10
million to launch their product (a very high sunk cost).
International trade restrictions
Tariffs
and quotas are deemed to be barriers to entry as they prevent firms from
competing in a particular market.
Restrictive practices
Restrictive practices are illegal and can occur in a
number of ways:
·
manufacturers may refuse to supply a retailer who stocks a
competitor's product, e.g., Brewers
- a firm may refuse to sell
one good unless the buyer purchases a whole range of goods, e.g., Levi's
won't just supply 501s.
- firms may lower the price
so much that competitors are driven out of the market, e.g., British
Airways are being accused of doing this with their budget airline Go.
|
