barriers to entry or exit

• A barrier to entry is any obstacle that prevents a new firm from entering a market
• What does the acronym Lloyds TSB help students remember in the context of barriers to entry?

  Legal, technical, strategic, brand loyalty
• Patents are a major legal barrier to entry
• A patent grants sole ownership of a creation, preventing other firms from copying it.
• What type of barrier to entry arises from excessive paperwork and bureaucracy?

  Red tape
• High product standards and regulations can act as a legal barrier to entry
• Excessive environmental regulations may deter new firms from entering a market.
• What is an example of a technical barrier to entry?

  High startup costs
• Sunk costs are costs that cannot be recovered when a firm leaves the market
• Advertising expenses are a type of sunk cost that cannot be recovered upon exit.
• Why do natural monopolies often have only one firm operating in the market?

  High economies of scale
• Predatory pricing is a strategic barrier to entry
• What is limit pricing designed to achieve in a market?

  Discourage new entrants
• Heavy advertising by incumbent firms can deter new firms from entering a market.
• Strong brand loyalty acts as a major barrier to entry
• What are barriers to exit?

  Obstacles preventing firms from leaving
• High redundancy costs can prevent a firm from leaving a market.
• Penalties for leaving contracts early can act as a barrier to exit
• Why might a firm with high sunk costs hesitate to exit a market?

  Unrecoverable expenses
• Barriers to exit can increase the risk of firms entering a market.