Barriers to entry and exit protect existing firms and allow them to maintain high profits. They include economies of scale, brand loyalty, and control of important technologies. Google faces few barriers to entry in search due to its vast scale and vertical integration advantages over potential competitors. Firms use strategies like limit pricing, predatory pricing, and brand proliferation to discourage competition. Industries with high minimum efficient scale and falling average costs are less contestable due to barriers to entry. Established firms have cost advantages from learning, integration, and scale that make entry difficult for competitors. Plant closures occur when price falls below average costs, showing the shutdown price.

1. Barriers to Entry and Exit

2. Barriers to entry and exit
• Block potential entrants
from making a profit
• Protect the monopoly
power of existing firms
• Maintain supernormal
profits in the long run
• Barriers to entry make a
market less contestable

3. Barriers to Entry?
V

4. Economies of scale Vertical integration Brand loyalty
Control of important
technologies
Expertise and
reputation

5. Google’s Dominance – Entry Barriers
Google controls almost 90
per cent of the search
market in the UK, and
almost 96 per cent of
Google's revenue still comes
from advertising
Market Power Through Vertical Integration

6. Strategies to Limit Competition
Limit pricing tactics Predatory pricing tactics
Brand proliferation

7. Strategies to Limit Competition
Limit pricing tactics Predatory pricing tactics
Brand proliferation
When a firm sets price
low enough to
discourage new
entrants into the
market

8. Strategies to Limit Competition
Limit pricing tactics Predatory pricing tactics
Brand proliferation
When a firm sets price
low enough to
discourage new
entrants into the
market
Setting an artificially
low price for a product
in order to drive out
competitors

9. Strategies to Limit Competition
Limit pricing tactics Predatory pricing tactics
Brand proliferation
When a firm sets price
low enough to
discourage new
entrants into the
market
Setting an artificially
low price for a product
in order to drive out
competitors
Saturating the market
with a huge range of
similar products

10. Legal Entry Barriers
Market licences Patent protection
State awarded franchises Import controls

11. Cost & Price
Output (Q)
Costs and contestability in different industries
Cost & Price
Output (Q)
Low MES, limited scale
economies, contestable market
High MES, falling LRAC, barriers to
contestability
LRAC
LRAC
P6

12. Cost & Price
Output (Q)
Costs and contestability in different industries
Low MES, limited scale
economies, contestable market
LRAC
Q1
Minimum
efficient
scale (MES)
Scope for many firms to
reach the MES
P6

13. Q3Q2Q1
Cost & Price
Output (Q)
Costs and contestability in different industries
Low MES, limited scale
economies, contestable market
LRAC
Q1 Output (Q)
High MES, falling LRAC, barriers to
contestability
Extensive internal
economies of scale
leading to lower LRAC
LRAC
Natural Monopoly
Minimum
efficient
scale (MES)
Scope for many firms to
reach the MES
Q4

14. Cost & Price
Output (Q)
Cost Advantages for Existing / Established Businesses
Cost advantage for Firm A over
a potential rival Firm B
At output Q1 – firm A has a big
cost advantage over a
potential rival firm B
Reasons?
Firm B
Firm A
Q1
AC (B)
AC (A)

15. Cost & Price
Output (Q)
Cost Advantages for Existing / Established Businesses
Cost advantage for Firm A over
a potential rival Firm B
At output Q1 – firm A has a big
cost advantage over a
potential rival firm B
1. Learning economies
2. Vertical integration
3. Lower customer churn
4. Monopsony power
Firm B
Firm A
Q1
AC (B)
AC (A)

16. Cost ,
Price
Quantity of output
Plant close-downs and market exit
MC
AC
AVC
Remember that MC
always cuts AC and AVC
at the minimum points

17. Cost ,
Price
Quantity of output
Plant close-downs and market exit
MC
AC
AVC
AR
MR
Q1
P1

18. Cost ,
Price
Quantity of output
Plant close-downs and market exit
MC
AC
AVC
AR
MR
Q1
P1
C1

19. Cost ,
Price
Quantity of output
Plant close-downs and market exit
MC
AC
AVC
AR
MR
Q1
P1
C1
Business is making a loss
here because P < AC
i.e. sub-normal profit

20. Cost ,
Price
Quantity of output
Showing the shut down price and the normal profit price on a diagram –
assume this firm is operating in a perfectly competitive market
MC
AC
AVC

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