Chapter 9.2, Problem 4R

To determine

To state: Two barriers to entry to keep potential competitors out of the market.

Answer to Problem 4R

The two barriers to entry in the market that would keep the potential competition out of the market includes natural and artificial barriers. Natural barriers are often formed due to the circumstances in the market whereas artificial barriers are especially created by the existing firms to prevent new firms from entering the market.

Explanation of Solution

Barriers to entry can be of any type- be it legal, technological, geographical, market forces, anything. It is often defined as an advantage to established sellers in the market over the potential new entries. It is the additional cost that is to be borne by the new sellers who wish to enter the market.

The following two types of barriers to entry in the market are as follows:

1. Natural Barriers-

It includes high research or development costs. There are certain products or services that require huge amount of money to be spent on research and development. So, when existing firms have already incurred such expense, it indicates that such firms have huge capital. In order to enter the market, new firms have to incur such high capital costs which is not possible for everybody. Therefore, huge initial investment poses as a barrier for the new entrants to enter the market.

Often times, huge set up costs are there like advertising or marketing costs which are often termed as sunk costs, i.e. they will not be recovered which results in many firms to not entering the market.

There are firms which own control over the scarce resources, again resulting in a strong barrier in the entry.

2. Artificial Barriers-
Predatory pricing i.e. the firm may put lower prices for their products to ensure that no new entrants can enter the market. Most of the times, big firms take over the small potential entrants through acquisition of their shares thereby enjoying a huge influence on the market.

A strong brand value also discourages a lot of new firms to enter the market, since they believe that the existing firms have a strong and loyal customer base and it will be difficult to shift such loyalty to them.

Patents and licenses have also made it difficult for new entrants to enter the market because the existing firms own license or patents for such product.

Economics Concept Introduction

Introduction: Barriers to entry is often defined as an advantage to established sellers in the market over the potential new entries. It prevents the new firms from easily entering the market and the industry.

The two barriers to entry in the market that would keep the potential competition out of the market includes natural and artificial barriers. Natural barriers are often formed due to the circumstances in the market whereas artificial barriers are especially created by the existing firms to prevent new firms from entering the market.

Barriers to entry can be of any type- be it legal, technological, geographical, market forces, anything. It is often defined as an advantage to established sellers in the market over the potential new entries. It is the additional cost that is to be borne by the new sellers who wish to enter the market.

The following two types of barriers to entry in the market are as follows:

1. Natural Barriers-

It includes high research or development costs. There are certain products or services that require huge amount of money to be spent on research and development. So, when existing firms have already incurred such expense, it indicates that such firms have huge capital. In order to enter the market, new firms have to incur such high capital costs which is not possible for everybody. Therefore, huge initial investment poses as a barrier for the new entrants to enter the market.

Often times, huge set up costs are there like advertising or marketing costs which are often termed as sunk costs, i.e. they will not be recovered which results in many firms to not entering the market.

There are firms which own control over the scarce resources, again resulting in a strong barrier in the entry.

2. Artificial Barriers-
Predatory pricing i.e. the firm may put lower prices for their products to ensure that no new entrants can enter the market. Most of the times, big firms take over the small potential entrants through acquisition of their shares thereby enjoying a huge influence on the market.

A strong brand value also discourages a lot of new firms to enter the market, since they believe that the existing firms have a strong and loyal customer base and it will be difficult to shift such loyalty to them.

Patents and licenses have also made it difficult for new entrants to enter the market because the existing firms own license or patents for such product.