BARRIERS TO ENTRY & EXIT OF MARKETS

The ease in which firms can enter and exit a market is a sign that the market is working. However there are many barriers to a firm entering a market: Capital costs The cost of setting up in some industries is very high. High capital costs may prevent a firm from entering Eg entering the car industry as opposed to the local shoe shop Natural cost advantag s Some firms have natural advantages Site location! natural resources They own factors that gives them a uni"ue advantage over other producers ! gal "arri rs #atent laws can prevent others from entering for several years The government may legally block producers for entering the market $aws put into place may make it difficult for firms to enter the market Econo#i s o$ scal Those industries which gain from E%S benefit from producing at the lowest cost possible Thus are able to satisfy most of the demands for the buyers &ew firms will find entry difficult as production costs will be higher and they may not be producing at the optimum level 'ndustries which have few firms will may be able to exploit the market more! by keeping competition out The situation may occur where there is a natural monopoly the is producing at the lowest cost possible and can see off new entrants

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Sun% costs (osts of production which are not recoverable should the firm leave the industry )achinery can be sold as can stock put wages! advertising good will cannot be recovered High sunk costs will discourage firms from entering the market since the cost of failure may be high. $arge firms already in the business have the advantage of being able to afford the spend a lot of money on promoting and advertising their products. This causes a barrier to firms which do not have the funds to spend and is an example of a sunk cost *dvertising and marketing increase brand image and customer loyalty + another barrier to entry R strictiv practis s Some firms purpose conduct their business in such a manner that other firms find it very difficult to enter the market )icroSoft! cinema distribution! (oca+cola These restrictive practises may be deliberate ,+ as in the case of above or innoc nt ntr& "arri rs , high costs of production! "ualifications! legal re"uirements Entry and exit to industries are based on the #ar% t structur ! which is the characteristics of a market that determine firms behaviour. -. .. 0. 1. 2. 3. 4. the number of firms in the market the si/e of firms in the market the number of firms that can enter the market the ease of entry the homogeneity of the product the amount of perfect knowledge in the market the affect another firms action has on the market

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