Economies of scale falls into 2 categories: However, the initial higher set up costs and cost to development of such product differentiation often deters initial market entry. Sales volumes are shifted through this awareness and a high rate of brand awareness usually leads Structural barrier of entry amway higher sales which can serve as an economic moat, preventing competitors from gaining market share such as Virgin Cola.
Predatory acquisition This involves taking over a potential rival by purchasing sufficient shares to gain a controlling interest, or by a complete buy-out. They can involve costs of purchasing or installing new equipment, loss of service during the switching process, and the effort involved in searching for a new supplier or learning a new system.
Owning scarce resources, which other firms could use, creates a considerable barrier to entry, such as an airline controlling access to an airport.
It involves the cost of purchasing or installing new equipment, loss of service during the period of change, the efforts involved in searching for a new supplier or learning a new system.
Unique qualities, creative ways of packaging or new functional features are some example of differentiation.
The higher the amount spent by incumbent firms, the greater the deterrent to new entrants. It refers to the effect that multiple users have on the value of a product or service to other users.
These are exploited by suppliers to a large extent in order to discourage potential entrants. Sunk costs are those that cannot be recovered when a firm leaves a market, and include marketing and advertising costs and other fixed costs. These are common when switching energy suppliers, banks, TV and telephone suppliers.
Natural or structural entry barriers include: This allows a company to acquire greater market-share, superior brand recognition and drive customer loyalty. References Structural Barriers to Entry Structural barriers to entry are the natural or tactical barriers that arise in a market preventing new entrants.
For small to medium size companies however, size does have its limits. A firm may deliberately lower prices to force rivals out of the market. A good example of a first mover is eBay which was the first company to take the auction process online, kicking off operations in Advertising Advertising is another sunk cost - the more that is spent by incumbent firms the greater the deterrent to new entrants.
This could be an investment in machinery, distribution facilities, real estate or other sunk costs. In order to compete, new entrants will have to match, or exceed, this level of spending in order to compete in the future.
When firms spend huge amounts on research and development, it is often a signal to the new entrants that they have large financial reserves. The spread of popularity of the telephone in the 20th Century, and more recently the increased popularity of social media, are example of strong network effects.
Artificial or strategic barriers include: These are the costs incurred by a customer when trying to switch suppliers.
While these may also be structural in nature it is common to refer to them as strategic barriers as they are understood and exploited by suppliers.
Network effects A network effect is the effect that multiple users have on the value of a good or service to other users. Scarcity requires companies to make economic decisions to control access and allocation of such resources efficiently. They can be erected deliberately by the incumbent s - called strategic or artificial barriers - or they can exploit barriers that naturally exist in the market, also called structural barriers.
The greater the number of people using the specific good or service the greater the individuals benefit. It is also a sunken cost. Economies of scale provide big companies with access to a larger potential markets with greater geographical reach. High set-up costs deter initial market entry.
This is best achieved by selling at a price just below the average total costs ATC of potential entrants. If a strong network already exists, it might limit the chances of new entrants to gain a sufficient number of users.
An increase in production efficiency directly related to size is a typical way to create a barrier for new firms, principally through the ability to produce at a significantly lower marginal cost.
At a certain point, an increase in output leads to an increase in production costs. As with other deliberate barriers, regulators, like the Competition Commission, may prevent this as it would reduce competition.
These may include technology challenges, government regulation and patents, start-up costs, or education and licensing requirements. The incumbent is exploiting its superior knowledge of the market, and production costs, for its own advantage. For example, the Queen Mary 2 project was announced in June and the first sheet of metal was not cut until January !Structural entry barriers result when the incumbent has natural costs or marketing advantages or benefits from favorable regulations.
Strategic entry barriers result when the incumbent aggressively deters entry. Structural Barrier of Entry: Amway Essay Qns 6 Entry and Exit will determine the extent of competition in an industry. Apply to the airline, pharmaceutical or supermarket businesses.
Using the industry of your choice, how can this company deter entry? Entry is. Barriers to entry. Oligopolies and Natural (or structural) entry barriers include: Economies of large scale production. Owning scarce resources, which other firms could use, creates a considerable barrier to entry, such as an airline controlling access to an airport.
High set-up costs. scholars have argued, for example, that an obstacle is not an entry barrier if incumbent firms faced it when they entered the market.
Others contend structural and strategic entry barriers? Is evidence of past entry conclusive? What are competition COMPETITION AND BARRIERS TO ENTRY Policy Brief For further information. Free Essay: Qns 6 Entry and Exit will determine the extent of competition in an industry.
Apply to the airline, pharmaceutical or supermarket businesses. Barriers to Entry and Exit. Levels: A Level; Exam boards: AQA, Edexcel, OCR, IB, Eduqas, WJEC; George Stigler defined an entry barrier as “A cost of producing which must be borne by a firm which seeks to enter an industry but is not borne by businesses already in the industry".
Structural, Strategic and Statutory Entry Barriers.Download