Barriers to entry and exit from the market manual. Mechanical engineering and mechanics. Tests. Topic Basics of the theory of market demand and supply The law of demand assumes that

William J. Baumol CONTESTABLE MARKETS: A REBELLION IN THE THEORY OF INDUSTRY STRUCTURE (MILESTONES, Vol. 5)

William J. Baumol. Determinants of market structure and the theory of competitive markets

MARKET (market) - an exchange mechanism that establishes direct contact between sellers and buyers of a product, factor of production or security. Markets vary in product, spatial and physical terms. For products, the market consists of groups of goods or services that are considered substitutes by buyers. Thus, from the buyer's point of view, women's and men's shoes are two individual market serving the needs various categories buyers.

In spatial terms, a market may be local, national or international, depending on conditions such as transport costs, the nature of the product and the homogeneity of consumer tastes. For example, due to transport costs, markets for cement and gypsum tend to be localized. Likewise, Bavarian beer caters only to specific regional tastes, while Coca-Cola is sold throughout the world as a recognized brand.

In physical terms, exchange transactions involving buyers and sellers may take place in a dedicated location (e.g. local fish market, wool exchange) or in more amorphous forms (e.g. buying and selling shares and stocks by telephone using international dealer communication systems ). Finally, in some markets, sellers deal directly with end buyers, while in others, transactions are conducted through a chain of intermediaries, such as wholesalers and retailers, brokers and banks.

Economists typically define a market as a group of products that are viewed by consumers as substitutes (i.e., have a high positive cross-elasticity of demand). This market concept may not correspond EXACTLY to INDUSTRY classifications, which group products into industries (see industry) in terms of their technical or manufacturing characteristics rather than interchangeability for the consumer. For example, glass bottles and metal cans are considered by consumers as interchangeable goods (containers), but belong to different entries in the industrial sector classification (glass industry and metallurgy, respectively).

Conversely, the industrial classification category “steel products,” for example, may include such diverse users as civil engineers (reinforced concrete slabs), automobile assemblers (vehicle bodies), and manufacturers of cleaning devices (washing chambers). ). However, due to the difficulty of obtaining reliable data on cross-elasticities of demand, economists often revert to industry classifications as the best way approximate representation of markets in empirical analysis.

Market theory distinguishes between types of markets according to their structural characteristics, in particular the number of buyers and sellers involved in the exchange. The following types of market situations are distinguished:

PERFECT COMPETITION = many sellers, many buyers

OLIGOPOLY = few sellers, many buyers

OLIGOPSONY = many sellers, few buyers

BILATERAL OLIGOPOLY = few sellers, few buyers

DUOPOLY = two sellers, many buyers

DUOPSONY = many sellers, two buyers

MONOPOLY = one seller, many buyers

MONOPSONY = many sellers, one buyer

BILATERAL MONOPOLY = one seller, one buyer

MARKET OF BUYERS (buyer's market) - a market situation in a short period when there is an excess supply of goods or services at current prices, which leads to a fall in prices in favor of the buyer. Wed. .

SELLERS MARKET(seller's market) - a situation on the market in a short period in which there is excess demand for goods and services, which allows the seller to raise prices to his benefit. Wed.

ENTRY CONDITIONS (condition of entry) - an element of the market structure that characterizes the ease or difficulty of new producers entering the market. According to market theory, market access can be either completely free (as in the case of perfect competition, when new producers can enter the market and compete on equal terms with established firms), or almost impossible (in situations of oligopoly and monopoly, when existing barriers to entry are rigidly restrict market access). The importance of barriers to entry in market theories is that they allow established firms to earn long-term profits that exceed the equilibrium normal profits that would occur under perfect competition (i.e., free market access).

See Market Entry, Potential Competitor, ,

ENTRANCE TO THE MARKET (market entry) - entry into the market of a new company or companies. Market theory assumes that firms enter a market by creating new ventures, thereby increasing the number of competing producers (see greenfield investment). The entry of new firms into the market occurs when firms established in a given market receive excess profits. The entry of new firms plays an important role in expanding the supply potential of the market and eliminating excess profits. In practice, new firms also enter through acquisition or merger with an existing firm.

Most markets are characterized by entry barriers that limit or discourage entry, protecting established firms from new competitors.

See entry conditions, potential competitor, potential competition market, perfect competition, monopolistic competition, oligopoly, monopoly, limit pricing,

See also:

Harold Hotelling. Stability in Competition

V.M. Galperin. Product differentiation and monopolistic competition ( )

NEW INVESTMENTS (greenfield investment) - the creation by a company of a new processing plant, workshop, office, etc. New investments are made by “starting” (i.e. new) business entities and existing firms in order to expand their activities (see organic growth). Building a new plant may be preferable to using existing plants in acquisitions or mergers (see external growth) because it gives the firm greater flexibility in choosing a suitable location. This allows it to build a plant the size of which is most suitable for implementation modern technology, thus avoiding the various problems associated with the rationalization and reorganization of existing plants and the practice of layoff restrictions.

See market entry, barriers to entry.

MONOPOLY COMPETITION , or AN IMPERFECT MARKET (monopolistic competition or imperfect market), - type market structure. The monopolistic competition market is characterized by the following features:

(a) a large number of firms and buyers: the market consists of large quantity independently operating firms and buyers;

(b) product differentiation: products offered by competing firms differ from one another in one or a number of properties. These differences may be physical in nature, including functional features, or may be purely “imaginary” in the sense that artificial differences can be created by advertising and promotion of a product (see product differentiation);

(c) free entry into and exit from the market: there are no entry barriers to keep new firms from entering the market, or obstacles to existing firms leaving the market (the “theory” of monopolistic competition does not pay attention to the fact that differentiation of products by establishing strong (consumer) brand loyalty to established firms' products may act as a barrier to entry).

With the exception of aspects related to product differentiation, monopolistic competition is structurally very close to perfect competition.

An analysis of the equilibrium of an individual firm under monopolistic competition can be carried out within the framework of the “representative” firm method, i.e., it is assumed that all firms face identical cost and demand conditions, each maximizing profit (see profit maximization), which makes it possible to determine the condition equilibrium in the market.

The importance of product differentiation is as follows:

(a) each firm has its own market, partially different from the markets of its competitors. In other words, each firm faces a demand curve that has a negative slope ( D in Fig. 71a). At the same time, the presence of competing substitute goods (high cross elasticity of demand) is the reason for the significant elasticity of this curve;

(b) firms' costs (marginal costs and average costs) increase over the long run as a result of costs associated with product differentiation (TRADE COSTS).

A profit maximizing firm will tend to produce at this price combination ( OR) and output volume ( OQ) (shown in Fig. 71a), which equalizes marginal costs ( MS) and marginal revenue ( M.R.). In the short term, this can lead to firms receiving excess profits.

Over the long run, excess profits will induce new firms to enter the market, and this will cause the demand curve for established firms to fall (i.e., it shifts the demand curve to the left, meaning that sales volume will decrease at each price level). The process of entry of new firms will continue until the additional profits disappear. In Fig. Figure 71 b shows the long-run equilibrium state for a “representative” firm. The firm is still maximizing profit at this price combination ( ORE) and output volume ( OQe) when marginal cost equals marginal revenue, but now she only earns normal profit. Equilibrium at the level of normal profit in the long run is similar to the equilibrium of a firm under perfect competition. But monopolistic competition generates less efficient market performance than perfect competition. The difference is that a firm under monopolistic competition produces less product and sells it at a higher price. high price than under perfect competition. Since the demand curve is downward sloping, it necessarily touches the long-run average cost curve (which is higher than the cost curve of perfectly competitive firms due to incremental trading costs) to the left of the latter's minimum point. Thus, each firm is less than optimal in size, resulting in EXCESS CAPACITY in the market.

See V.M. Galperin. Microeconomics, chapter 12. Product differentiation and monopolistic competition

You can search for terms and their interpretations on all websites of the School of Economics:

IN economic theory There is an approach that considers the number of market participants and the size of their market share as secondary criteria, and the main indicator of the shape of the market and the state competitive environment in the market considers barriers to entry and exit from the market. This approach was developed in the form of the theory of competitive markets (contestable markets). This theory is based on the proposition that as long as entry into and exit from the market is not associated with serious difficulties for the company, potential competition is maintained in the market, and sellers and buyers act in the same way as in conditions of perfect competition.

More often barriers to market entry and exit it is considered as the sum of costs incurred by a firm entering the market or a firm leaving the market. A company that is already operating in the market does not have costs associated with acquiring rights (patents, licenses, etc.) to intellectual property, without which it is impossible to carry out certain types of activities, produce goods and provide services. A company that is already known to customers does not need to spend large budgets on introductory advertising, collecting information about the market - these are all the costs associated with entering a new market for the company. When exiting the market, costs arise that will not be covered by depreciation charges in the future; they will remain a loss for the enterprise (costs associated with the disposal of special equipment and materials, the acquisition of special knowledge and skills, costs for the acquisition of intellectual property that were not depreciated and not may be sold, etc.).

Barriers to exit from the market influence the decision to enter the market, because if in case of failure you cannot leave the market without a significant loss of invested funds, then is it worth entering it?

All barriers can be divided into two categories: strategic (set at the initiative of market participants) and non-strategic (formed as a result of a certain combination of conditions external environment).

Strategic barriers include:

• constant updating of products and technologies based on implementation R&D results– this requires significant costs, which pay off in the long term;
• long-term contracts with input suppliers or workers so that suppliers or contractors do not have spare capacity to service a new enterprise entering the industry. This same group of barriers can include control over sources of mineral and other raw materials. For example, control over deposits guarantees that no producer will be able to buy raw materials in a given territory at a price lower than the established one;
• obtaining licenses and patents for this type activities and their maintenance, which also requires financial costs;
• increase in advertising and R&D costs, marketing research, the costs of creating a company's image leads to an increase in the minimum effective sales volume in the industry;
• price barriers - setting a price that gives the company the opportunity to receive only a minimum profit or even just cover costs. Dumping pricing (setting a price below cost) is prohibited by law, but its existence is difficult to prove. To use this barrier, industry enterprises must have an accurate understanding of the relationship between aggregate demand and aggregate supply and be prepared to receive minimal profits in the short term. The use of such a barrier requires the enterprise to choose between maximizing short-term profits and prohibiting the entry of new enterprises into the industry, which ensures a long-term stable state of the competitive environment in the industry. Often this barrier is formed artificially and maintained by oligopolists or a monopolist on the basis of inflated costs, while the effective minimum production volume is much less than that declared by enterprises operating in the industry.

Non-strategic barriers usually arise as a result of a combination of environmental conditions, legislative acts and have little dependence on the activities of enterprises in the industry. These include:

• product differentiation within the range sold by a separate enterprise. In this case, it is difficult for a new enterprise to find its market niche, since most of the substitute products are already present on the market. The buyer is given the illusion of competition between several brands, although all these brands are produced by the same manufacturer;
• sunk costs resulting from investing in special equipment and other assets that are difficult to sell if they exit the market.

A generally accepted classification of industry markets depending on the effectiveness of barriers to entry into the market is the classification of J. Bain. In his work Burners to New Competition Four types of industry markets have been identified.

• 1. Industries with free entry. Enterprises present on the market do not have advantages over potential competitors. In such markets, resources are fully mobile, and the price of goods in the industry is set equal to marginal costs.
• 2. Industries with ineffective barriers to entry. Enterprises present on the market can set entry barriers using various methods of price and non-price policies, but for them it is preferable to make a profit in the short term. The problem is that entry barriers remain effective in the short term, but in the long term new businesses can enter the industry.
• 3. Industries with effective barriers to entry. Entry barriers are effective in the short and medium term, but in the long term, some enterprises enter the industry and disrupt the existing structure of the industry.
• 4. Markets with blocked entry. The number of enterprises in the industry has remained stable for a long time. The entry of new enterprises into the market is impossible due to high stable barriers in both the short and long term.

EXAMPLE 11.1

The absence of barriers to entry into the dairy products market for suppliers from the Republic of Belarus led to the fact that during 2012, Russian producers of butter, milk powder, hard cheeses and other milk-intensive goods were unable to sell their products not only profitably, but at least at cost. There is an agreement between Russia and Belarus on indicative prices for milk and dairy products, but since the beginning of 2012, Belarusian producers began to increase supplies of milk, butter, milk powder and other types of dairy products, violating the level of indicative prices.

The National Union of Milk Producers (Soyuzmoloko) characterized the current situation as dumping on the part of importers, but the Belarusian side insisted that participation in the Union State and Russia’s accession to the WTO means complete openness Russian market for Belarusian suppliers, abandonment of such regulatory methods as restrictions on the import of goods, establishment of threshold prices, etc.

State subsidies allow Belarusian producers to keep prices low. In Russia, each liter of milk produced is subsidized by 0.2-0.5 rubles, and in Belarus it is approximately five times more. As a result, Belarusian producers can supply milk and dairy products to the Russian market at prices below market prices, and Russian producers cannot compete with them on price.

Wholesale and retail trade in Belarusian dairy products turns out to be much more profitable than Russian ones. As a result, Belarusian dairy products are crowding out domestic ones from retail.

• First work in this direction: Bain Joe S. Barriers to New Competition. Cambridge, 1956.

Barriersonat the entrance(barriers to entry)

1. Scale of investment. Construction of larger or more modern factories, service networks or retail retail outlets can reduce the desire of competitors to try to compete with you. It’s especially good if you have your own base regular customers because it will take longer for new entrants to scale up enough to recoup their initial investment, or if your investment allows you to have lower costs than your competitors.

2. Branding. Actions aimed at making your product or service synonymous with superior and consistent quality.

3. Service. Providing such a high level of service that customers have a natural desire to remain loyal to the company and have no incentive to switch to competitors.

4. The existence of “switching costs”.“Tying” buyers to yourself, for example, through the use of product promotion programs similar to those used by Air Miles, in which customers are given the opportunity to save money if they use goods and services from one supplier. Buyers may also be given discounts upon reaching a certain sales level, or even receive free equipment (e.g. freezers for new ice cream sellers), which, however, the owners have the right to take away if facts of purchasing goods from competitors are noted. In the field professional services"retention" of a client may be based on the fact that the existing firm may know so much about the client's business that a new firm providing similar services will take too long to "get up to speed."

5. Restriction of access to distribution channels. Acquiring distribution companies or establishing special relationships with them that makes it difficult or impossible for other suppliers to bring their products to end consumers. A policy that has been followed with great success for many years, for example, in the gasoline retail trade, where the favorable location of gas stations owned by major oil companies has helped increase their sales of petroleum products.

6. Restricting access to resources. Obtaining high-quality (or all available) raw materials either by purchasing its source (as dairy producers, for example, usually do), or by establishing special relationships with suppliers, or by purchasing raw materials at higher prices.

7. Property Rights (Location). The ability to take the most advantageous places can be key point in such diverse business areas as petroleum products production and retail trade. Therefore, from time to time it makes sense to think about whether the desired location will change in the near future, and without delay book new promising places, for example on the outskirts of the city, away from large retail outlets.

8. Competence - hiring the best employees. Knowing how best to deliver what the customer values ​​most is an often overlooked barrier. The key is to identify the most important competencies of your staff and then ensure that your firm is better than anyone else in that area. For example, in the field retail With mass-produced goods, purchasing and sales skills are key. Wal-Mart, the leading retailer in the United States, has a huge advantage because it employs the best purchasing professionals and has established best relations with suppliers. Hiring the best talent in the industry can be an effective tactic, but only if those people fit the company's culture or the culture can be tailored to realize the full potential of those employees.

9. Competence in the field of intellectual property - patents. In many cases, the logical continuation of paragraph 8 is obtaining a patent. In some businesses, such as pharmaceuticals, patents are extremely important and provide much higher profits than would otherwise be possible. Intellectual property is important in a surprising number of areas of business, and it is therefore worth constantly checking to see if anything your firm owns might be patentable.

10. Having the lowest costs. One of the best barriers is to be able to produce a product or service for a particular market at a lower cost than competitors, usually by having a larger market share (and correspondingly larger scale of production) in that segment, and vigorously defending that comparative advantage. To be most effective, the cost advantage must be expressed in the form of more low prices, although using more money than competitors can afford for advertising, sales agents and research can also be effective way taking advantage of lower costs (and more high profits) to create barriers.

11. Competitive reaction. Making it clear to competitors that you will defend “your territory”, if necessary, with “extreme” measures, is a very effective barrier to entry. If a competitor ignores the warnings and enters the market, the response must be immediate and devastating, such as cutting prices for its potential buyers.

12. Maintaining confidentiality. Sometimes a profitable market is relatively small, and its existence and potential profitability may be unknown to competitors.

It is very important to hide these segments from competitors, if necessary, this can be done even by hiding or downplaying their importance to your company. On the contrary, those who strive to reach new market, gotta put everything in necessary funds in order to obtain information about potential buyers.

Barriers to exit

Exit barriers are forces that make it difficult to exit a market and cause too many competitors to remain in a market. These barriers lead to overcapacity and low profitability because firms believe that going out of business will cost them dearly. Exit barriers can be real or imagined, economic or illusory.

In general, it should be noted that too much attention is paid to exit barriers, and very little attention to entry barriers.

1. Costs associated with dismissal of employees. The cost of paying severance benefits to employees can be very significant, and can be several times greater than the annual loss from continuing the business. If a company experiences a shortage Money, perhaps it would be better for it to continue operating for a while longer, and hope that other firms will be the first to cut back production capacity, thus delaying or even eliminating the need to spend money on laying off workers.

2. Write-off of capital costs. Leaving a business may result in the write-off of expensive plant and equipment that can only be used in that business. This leads to a feeling that the investment was in vain and to significant one-time losses that are reflected in the income statement and lead to a decrease net assets in balance. However, as a rule, this is not good reason in order not to decide to leave an unprofitable business - losses are only a record on paper and do not reflect economic reality. A business that should take a write-off but doesn't is no longer valuable and may be less valuable than a business that does take the step. The stock market understands this, and often large losses and write-offs in an operating company are accompanied by an increase in the price of the company's shares, as investors are pleased with the realism of managers and the cessation of unprofitable activities.

3. Real costs associated with leaving the business. Leaving a business can sometimes result in real one-time costs other than the cost of laying off employees. For example, a quarry may be required to pay for landscaping restoration work; the store may have to renovate the premises before leaving. One of the most significant costs associated with going out of business is long-term rental agreements for properties that cannot be re-rented at the same high rates paid this company, and payments for which must be made even after the business is closed.

4. Combined costs. Often, difficulties with leaving an unprofitable business arise due to the fact that this exit entails an increase in the costs of another, previously profitable line of business, due to the fact that part of the costs associated with them were common. For example, a plant may produce two products that share common overhead costs (and sometimes the costs of labor costs may also be common). labor), or sales agents may sell the two products to the same customers. Very often, however, the argument about the existence of shared costs is just an excuse for inaction. The right solution, always possible (no matter how painful it may be), is to reduce overhead profitable business to a level that will allow him to make a profit even after the closure of the unprofitable one.

5. Customers' demand for comprehensive services. Some customers place a high value on providing a variety of products from the same supplier and are reluctant to go to someone who only offers a limited range of products. profitable products. For example, a supermarket that refuses to sell items that it specifically sells at a loss to attract customers, such as refried beans or milk, may lose many customers. Very often, however, this is just an excuse, since buyers would buy a narrower range of products if it were truly profitable for them.

Determination of barriers to entry and exit to the market. Types of strategic and non-strategic barriers.

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Barriers to entry into the market are factors of an objective or subjective nature that make it difficult, and sometimes impossible, for new firms to start a business in the chosen industry. Types of entry barriers. Entry barriers can be divided into two large groups: non-strategic and strategic barriers.

Non-strategic barriers are those created by the fundamental conditions of the industry, factors of an objective nature and, for the most part, independent of the activities of the company. These include: Restrictions on demand (market capacity): -high saturation of the market with goods, -low solvency of the population, -presence of foreign competitors. Cap level costs: - costs of developing the production of a given product, - cost of new construction, re-equipment of existing facilities, etc. Administrative barriers: - licensing of enterprises' activities, - production quotas, - complicated registration procedures for new enterprises, - environmental standards, - restrictions on land use. State of market infrastructure. Criminalization of the economy Strategic barriers are those created by the strategy of the company itself, factors of a subjective nature inherent in the company's policy in the market. These include: Pricing that limits entry. Non-price strategies for creating barriers in the industry: a) Will complement investment in equipment. b) Product differentiation.

Barriers to entry and exit: how to protect markets, strengthen business and eliminate competition

c) Long-term contracts with third parties. Strategic barriers to entry and exit to the industry market. Problems of strategic barriers. Strategic are barriers created by the strategy of the company itself, factors of a subjective nature inherent in the company's policy in the market. These include: Pricing that limits entry. Non-price strategies for creating barriers in the industry: a) Will complement investment in equipment. b) Product differentiation. c) Long-term contracts with third parties7. Barriers to exiting the industry market. Types of exit barriers. Indicators of statistics on the entry and exit of firms from the market. Types of non-strategic barriers to entry of firms into the market Administrative (“government”) barriers are legally enforceable (through legislation or regulations) restrictions on the conduct of certain types of activities (their licensing and issuance of permits for certain types of business, distribution of quotas between firms, certification of products and equipment, establishment of norms of economic control, various regulations for the import and export of resources, etc.); overcoming them requires time and financial costs from business entities. The barriers in question in any given period can be an important lever for regulating the economy and bringing income to the state treasury, but ultimately (in the long term), they sometimes become a factor restraining economic activity, including due to the corruption potential they contain (the possibility permitting or prohibiting certain aspects of the activities of economic entities is always accompanied by officials’ hopes for appropriate “gratitude”). The height of administrative barriers can be presented as a function of two variables - the above-mentioned time and monetary costs (time spent on established bureaucratic procedures is logical to consider from the point of view of lost profits; the cost of money to overcome the administrative barrier is naturally qualified as mandatory payments). Comparison of the corresponding functions for various industry markets gives a picture of the level of the considered barriers in the economy. In addition to purely administrative barriers, any state legislatively uses barriers of an organizational and economic nature, determining the rules for the functioning of industry markets and pursuing one or another industrial, structural, investment, tax, customs and other economic policies on them.

4. Price discrimination and its consequences for public welfare.

One of the manifestations of market monopolization is price discrimination. It manifests itself in the fact that goods are sold at different prices various consumer groups. Discrimination is applied if a company has the ability to set prices for products, b) differentiates buyers by highlighting relevant market segments, c) the costs of implementing such a policy are small, d) buyers do not have the opportunity to purchase goods at a lower price. Price discrimination is when a seller sets different prices for different buyers. Price discrimination increases the efficiency of resource allocation in the economy, but allows the seller to appropriate consumer surplus. Price discrimination is the sale of one product (service) to different consumers at different prices. Price discrimination is used to expand the market for products. For price discrimination, two conditions are necessary: ​​· the possibility of identifying different market segments depending on the elasticity of buyer demand; · the impossibility of resale of a product (service) by the primary buyer to another consumer. There are several types of discrimination: 1. Depending on the volume of the product purchased (the less you buy, the higher the price);2. Depending on the buyer group - each group of buyers is offered the same product at a different price (fare for pensioners and workers, sale of goods in the city and rural areas, etc.);3. Depending on the time (selling goods during the day and at night)4. Exclusive discrimination: price is determined on a case-by-case basis. A policy of discrimination can benefit not only the monopoly by increasing sales and profits, but also a certain group of consumers, as it provides the opportunity to purchase a product due to the fact that the price is determined depending on purchasing power. Monopolization of the economy can occur as a result of the effect of economies of scale in production, and in this case a natural monopoly arises, i.e. a situation in which only one firm can satisfy a demand at the lowest average cost. The activities of such monopolies are regulated by the state through price controls. There are two approaches to solving this issue: 1) The price is set at the level of average costs. In this case, the company breaks even, but prices are higher than in a perfectly competitive market and efficient allocation of resources is not achieved (not all consumers can purchase this product), and production efficiency is not achieved. 2) Setting prices at the level of marginal costs. In this case, efficient distribution of resources is achieved, that is, the needs of society are fully satisfied. Very often in this case the price is below average costs. This means that the manufacturer incurs losses in the production of this product. He will engage in the production of these products only if the state subsidizes production. Since the state generates its income through taxes, in this case there is a redistribution of funds between different layers and segments of society. The state can direct the funds received as a result of taxes to producers of products or their consumers. In the first case, the price is set below costs, but the firms' losses are compensated, and they have no desire to improve the organization of production or reduce costs. In the second case, the price allows firms to compensate for all costs, and consumers with incomes below the subsistence level receive from the state monetary compensation and have the right to choose to spend it for their own purposes. Most countries use the second one.

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Entry and exit barriers often have a significant impact on a business. The former allow some companies to protect themselves from competitors (or prevent them from entering a new market), while the latter sometimes serve as a real barrier, forcing a company to remain in a disadvantageous market (or simply prolonging its stay in it). Let's try to figure out below what the entry and exit barriers are.

Entry barriers:

Exists great amount entry barriers. If you wish, you can come up with them almost endlessly, because everything depends on each specific business. We will look at common problems.

1) Economies of scale

This effect covers quite a lot of moments at once. Firstly, these are costs, which for an existing company with a solid market share will be noticeably lower than for a newcomer. Secondly, this is the amount of investment that a new company will have to make in order to gain a foothold in the market. The more investment required, the less likely the company will appear.

2) Client base

In some types of business, all interaction with customers is carried out through the customer base. This is quite relevant, say, for the b2b industry. Naturally, a beginner most likely does not have such a base. And this imposes certain problems on him at the start.

3) Famous brand

Availability on the market famous brand, naturally, undermines the company’s desire to reach him. It will be very difficult to compete with him in terms of advertising opportunities, and it will take a lot of time. So having a brand for a company (or a situation where the company itself is a brand) is a serious competitive advantage.

4) High cost of switching suppliers

It is quite a normal situation when a more advantageous offer appears on the market, but the client of the existing company is not going to change it for the simple reason that the costs of changing the supplier will be too high. For example, airlines give their customers free miles when they fly on their planes. This is one example of the high cost of switching providers, because then all the free miles will be lost. In the world of CRM systems, this can be a significant cost to implement a new system.

5) Problems with product distribution

A situation is possible in which a company operating in the market will do everything to prevent newcomers from gaining access to distributors. This can be completely achieved different ways, starting from concluding an exclusive agreement with distributors and ending with their takeover.

6) Components and raw materials

Here the situation is approximately the same as in the previous case. It doesn't make much sense to explain in more detail.

7) Patents

Having patents can greatly help a company in the market. New competitors may well be caught using patented technology. Many business sectors, of course, can hardly boast of the importance of patents to them. But in others the situation is completely different. To the point that competitors cannot appear in principle because of the patent. The most famous industry in this regard is pharmaceuticals.

8) Possibility of price reduction

If costs allow, then the company may well reduce prices in order to crush the newcomer. This approach is often used in business. True, one must understand that it will not necessarily please the company itself particularly, since raising prices to the previous level will be quite problematic.

9) Favorable place of sales

In some areas of business, sales success is determined by location. In this case, if the existing company has already taken a good place, leaving nothing good left for newcomers, it becomes pointless to talk about the emergence of competitors.

Output barriers

The importance of entry barriers is clear. Weekends are talked about much less often. They prevent companies from exiting a business that has long been unprofitable. These problems are not as important as the input ones, but they are worth considering to at least have an idea.

1) Severance pay

In this situation, the company is in no hurry to close an unprofitable division for the simple reason that paying severance pay seems to be too much of a burden.

Barriers to entry

This is a completely normal situation, unfortunately devoid of sound logic. Yes, there are closing costs. There's nothing you can do about it. But continuing to work will not bring anything good. Unless there are new problems.

2) Write-off of plants, equipment, etc.

In this case, the company faces only losses associated with the write-off of expensive equipment.

3) Image

In some cases, companies are afraid to close unprofitable production for the simple reason that this will negatively affect their image. In fact, everything is not quite like that. Even the stock market knows situations when a company's shares grew after the closure of a particular production facility.

4) Trade unions and government intervention

In some situations, unions can prevent the closure of an unprofitable enterprise. In addition, do not forget about the possibility government intervention, which always exists.

Barriers to entry and exit from the market relate to the most important characteristics market structures. These are objective and subjective factors that must be carefully examined and taken into account when organizing the company’s market activities. Due to the existence of such barriers, firms already operating in the market are largely freed from the need to fear suddenly emerging competitors.

Barriers to exiting the market may be associated with significant costs, for example, the need to sell specialized equipment, which significantly increases the level of risk for the company. Barriers to entry and exit from the market in combination with high level concentration of firms in the market makes it possible for firms to raise prices above the marginal level of costs, to receive economic profit in the long term.

There are two types of barriers.

The first of these includes objective characteristics of the industry market, the so-called non-strategic barriers:

- production technology;

— consumer preference;

— dynamics of demand;

- foreign competition.

The second type includes the so-called strategic barriers associated with the fundamental principles of the behavior of firms in the market, including:

— strategic pricing that limits the market entry of potential competing firms;

— strategic, long-term policy in the field of spending on research, development, scientific, technical and organizational innovation;

— patent policy;

— vertical integration;

— product differentiation.

Strategic barriers are closely related to strategic concept company, characterizing the active interaction of the company with environment. Strategy is understood as an active, targeted policy of interaction between a company and the environment in the current and long-term periods, including overcoming risks at points of unstable equilibrium. The company should strive to:

- take into account the behavior of international economic organizations, as well as the government itself in the implementation of economic policy and the formation of long-term international and national economic prospects;

— explore and take into account the dynamics of competitors’ behavior processes;

- actively influence demand, form consumer offers, achieve the desired taxation, customs duties, quotas, adoption of antimonopoly laws, etc.;

— actively participate in the formation of industries, microeconomic (and macroeconomic) policies of the state;

— actively build your economic potential – order portfolio, hiring professional personnel, relations with suppliers and customers, etc.

Let's take a closer look at non-strategic barriers to entry into the market.

If there are firms in the industry that produce goods with costs

greater than the minimum values ​​of average long-term costs, due to price competition these firms will suffer losses and stop production.

Additional information about barriers to entry is generated by an asset indicator, the ratio average size value added per worker in the first decile of the sample large enterprises to the same rate for the last decile of the industry sample.

Barriers to entry and exit from the market

The advantage indicator for large companies of 1.25 characterizes a significant barrier to entry for firms into the market.

Self-test questions.

1. Define markets.

2. Specify the criteria for identifying the market.

3. What is an alternative method for assessing markets?

4. Give an idea of ​​the internal structure of the market.

5. What are the barriers to entry and exit from the market?

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Barriers to entry into an industry are factors that prevent new players from entering the market, as well as holding back weak competitors from strengthening their position in the industry. How do they work? Strategic barriers to entry create conditions in which the costs of entry and existence in an industry become so high that they threaten the viability and profitability of the business for competitors. Any company that has a stable, good position in the market should strive to establish barriers to entry for new players into the market.

Michael Porter describes industry entry barriers well in his model “The Five Forces of Industry Competition” and identifies the following strategic barriers to entry:

1. Economies of scale

Barriers to entry into the market (page 1 of 2)

Product differentiation

3. Capital requirement

22. Barriers to entry and exit in the industry

It turns out that it is very difficult to capture a market and become a monopolist on it, but it is even more difficult to keep this market in your hands. Therefore, monopolists have long learned to erect barriers to entry into the markets they control. It is these barriers that prevent new competitors from penetrating monopolized markets and changing the situation there for the better for buyers.

Barrier entry- a limiter that prevents the emergence of new additional sellers in the market of a monopoly firm. Barriers to entry are necessary to maintain a monopoly over the long term. Thus, if free entry into the market were possible, then the economic profits received by the monopolist would attract new sellers to the market, which means that supply would increase. Monopoly control over prices would disappear altogether, because markets would eventually become competitive.

Types of barriers preventing new firms from entering monopolized markets:

1) legal barriers. Entry into a monopolized market can usually be greatly limited by legal barriers. The most ancient forms of such barriers were monopoly rights, which were appropriated by the right of the strong rulers and which over time became known as state monopolies.
It must be said that the state gives birth to a monopoly or creates conditions for it even when the benefits from this accrue primarily not to the state treasury, but to other individuals or organizations.
For example, the state licenses certain types of activities, and it is simply impossible to engage in such activities without obtaining a state license. The result of licensing is the restriction of access for those wishing to penetrate certain areas of activity and, consequently, the creation of preconditions for the birth of monopolists. The most important type of legal barriers that create and protect a monopoly are patents for inventions and scientific and technical developments.
Patents and copyrights provide creators with new products or works of art, literature, music, etc. exclusive rights to sell, use, license to use their inventions and creations. Patents may be issued for manufacturing technologies. But patents and copyrights only provide monopoly positions for a limited number of years, depending on local laws. Once the patent expires, the barrier to entry into the industry disappears. The idea of ​​patents and copyrights encourages firms and individuals to invent new products because the inventor is guaranteed in advance exclusive rights to sell the product;

2) natural barriers. In some cases, the birth of a monopoly turns out to be almost inevitable for purely objective reasons. Such monopolies are usually called natural because the barriers that give rise to them are natural, i.e. naturally inherent in a particular market.
A natural monopoly is an industry in which the production of goods or the provision of services is concentrated in one company due to objective (natural or technical) reasons, and this is beneficial to society.

Depending on the type of natural monopoly, there are two types of natural barriers:

a) when the birth of monopolies occurs due to barriers to competition erected by nature itself. For example, a company whose geologists discovered a deposit of unique minerals and which bought the rights to the land plot where this deposit is located can become a monopolist. Now no one else will be able to use this deposit: the law protects the rights of the owner, even if he ultimately turns out to be a monopolist (which does not exclude regulatory intervention by the state in the activities of such a monopolist);

b) the second type of natural barriers that prevent competitors from entering the monopolist’s market is characteristic of monopolies, the emergence of which is dictated by either technical or economic reasons related to the manifestation of economies of scale;

3) economic barriers. Such barriers are erected by monopolistic firms themselves or are a consequence of the unfavorable general economic situation in the country.

Barriers to entry into an industry controlled by a monopolist can also include:

1) ownership of all supply of productive resources. A monopoly can also be maintained by owning all sources of a particular resource needed to produce the monopolized good;

2) unique abilities and knowledge can also create a monopoly. Thus, singers, artists, and athletes have a monopoly on the use of their services. A company that has a technological secret, provided that other companies cannot reproduce this technology, has a monopoly on this product. Although, as a rule, such a monopoly is not pure, because There may be close substitutes for this product.

(Materials are based on: E.A. Tatarnikov, N.A. Bogatyreva, O.Yu. Butova. Microeconomics. Answers to exam questions: Tutorial for universities. - M.: Publishing house "Exam", 2005. ISBN 5-472-00856-5)

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home » Investments » Barriers to entry and exit from the market manual. Mechanical engineering and mechanics. Tests. Topic Basics of the theory of market demand and supply The law of demand assumes that