What are the ways that a firm can create barriers to entry to deter competition in its business? What factors determine whether these barriers are likely to be enduring?

Answer 1

Barriers to entry allow a firm to earn profits while at the same time preventing other firms from entering the market. The primary sources of barriers to entry include economies of scale, absolute costs advantages, product differentiation advantages, and government restrictions on entry of competitors. Firms can create these barriers through a variety of means.
1 . A firm can engineer and design its products, processes, and services to create economies of scale. Because of economies of scale, larger plants can produce goods at a lower cost that smaller plants. Hence, a firm considering entering the existing firm's market must be able to take advantage of the same scale economies or be forced to charge a higher price for its products and services.
2 . Cost leaders have absolute cost advantages over rivals. Through the development of superior production techniques, investment in research and development, accumulation of greater operating experience or special access to raw materials, or exclusive contracts with distributors or suppliers, cost leaders operate at a lower cost than any potential new entrants to the market.
1 . A firm can engineer and design its products, processes, and services to create economies of scale. Because of economies of scale, larger plants can produce goods at a lower cost that smaller plants. Hence, a firm considering entering the existing firm's market must be able to take advantage of the same scale economies or be forced to charge a higher price for its products and services.
3 . Differentiation of the firm's products and services may also help create barriers to entry for other firms. Firms often spend considerable resources to differentiate their products or services. Soft drink makers, for example, invest in advertising designed to differentiate their products from other products in the market. Other competitors that would like to enter the market will be forced to make similar investments in any new products.
4 . Firms often try to persuade governments to impose entry restrictions through patents, regulations, and licenses. AT&T fought with the government for many years to prevent other providers of long distance telephone service from entering the market. Similarly, the local Bell operating companies have lobbied the federal government to write laws to make it difficult for other firms to provide local phone service.
Several factors influence how long specific barriers to entry are effective at preventing the entry of competitors into an industry.
• Economies of scale depend on the size and growth of the market. If a market is growing quickly, a competitor could build a larger plant capable of producing at a cost lower than the incumbent. If a market is flat, there may not be enough demand to support additional production at the efficient scale, which forces new entrants to have higher costs.
• Absolute cost advantages depend on competitors' difficulty in designing better processes. Some processes receive legal protection from patents. Entrants must either wait for the patent to expire or bear the expense of trying to invest around the patent. Similarly, differentiation advantages last only so long as a firm continues to invest in differentiation and it is difficult for other firms to replicate the same differentiated product or service.
• Incumbent firms and potential entrants can both lobby the government. If potential entrants launch intensive lobbying and public interest campaigns, laws, regulations, and rules can change to ease entry into a once-protected industry. Several examples in the U.S. are deregulation of the airline, trucking, banking, and telecommunications industries.