What are the major barriers to free entry?

Name: Problem 10, Chapter 12: Intermediate Microeconomics
Uploaded: 2019-08-03T17:14:27-08:00
Duration: 8 min 24 s
Channel: Mihir Nayar
Description: What are the major barriers to free entry?

Key Concepts

Network_Effects

Network effects occur when the value of a product or service increases as more users join or adopt it. In markets with strong network effects, new entrants struggle to attract customers away from established firms that already have a sizable user base.

Product_Differentiation_and_Brand_Loyalty

Product differentiation and brand loyalty involve creating unique product features or establishing a strong brand that resonates with customers. These factors can serve as barriers to entry because they make it challenging for new competitors to convince consumers to switch from well-established brands.

Government_Regulation

Government regulation includes licenses, permits, and compliance requirements that firms must meet to operate legally in a market. These regulatory requirements can be significant barriers to entry, especially in industries where strict oversight is common.

Barriers_to_Entry

Barriers to entry are obstacles that make it difficult for new competitors to enter an industry. They include factors such as high costs, regulatory requirements, and other challenges that protect existing firms from new competition and help sustain their market position.

Economies_of_Scale

Economies of scale occur when a company's per-unit costs decrease as it produces more goods or services. This advantage can deter smaller or new entrants who may not easily achieve the large-scale operations needed to compete cost-effectively.

Sunk_Costs

Sunk costs are investments that cannot be recovered once made, such as specialized equipment or research and development expenses. These unrecoverable costs discourage potential entrants from entering an industry if they cannot be offset by future revenue.

Transcript

00:01 Hey everyone, today we're solving problem number eight from chapter 9 of the text book, which asks us to define what barriers of entry are, sorry, what barriers to entry are, and then give some examples of barriers to entry.

00:13 So in your textbook, they give you the situation that because of lack of competition monopolies, which are companies that control all of one output, 10 turn significant profits, a pretty obvious statement.

00:27 These profits should attract leaders ' competition, and yet because of one particular characteristic, they do not.

00:33 And that characteristic is going to be barriers to entry.

00:38 And barriers to entry are legal, technological, or market forces that discourage or prevent potential competitors from entering into a market.

00:49 So what are you going to write that? legal, technological, which i will simply abbreviate with tech or market forces.

01:19 Because in an idealistic world, actually not an idealistic world, but in reality, you would think that monopolies would have competitors.

01:31 Like facebook has a competitor with instagram.

01:34 But in a lot of cases, because of there's entry, monopolies are able to really dominate.

01:42 As facebook was for a long time before, like an instagram thing along.

01:56 Again, these are legal, technological, or market force.

02:04 Those are the three adjectives to describe the forces themselves and they will discourage, which means to push away other competitors or altogether prevent them from entering into that market.

02:26 So social media is considered a market.

02:31 Sorry, discourage or yeah, prevent.

02:41 As i'm writing this, hopefully you guys are starting to see some examples.

02:45 I know for legal patents are constantly.

02:49 Common example, copyright laws.

02:53 For example, well, i'll get to the examples a little bit later.

02:58 But essentially what we're getting down to here is that first entry actually helped a company that's already broken into a new industry to come a monopoly, because it prevents their potential competitors, from even entering to that market after them.

03:24 Brand name, brand recognition, you know, that's a big thing too.

03:33 Like if i recognize a certain brand like chipotle more than taco bell or pizza hut or pop belly sandwiches like in the midwest for instance, then, you know, i'm going to go with the chipotle, even though those are the other competitors.

03:49 That's a force that could discourage, you know, the taco bell from entering into the market.

03:56 On the flip side, pop valley sandwiches, which is a sandwich chain in the midwest, you know, and may be more popular than subway sandwiches in the midwest.

04:05 That may discard subway from opening up a lot of restaurants in the midwest.

04:13 Conversely, a lot of people know subway is a brown name, and they know their jingle, like their motto be fresh.

04:23 So that could prevent pop valley from being super successful in the midwest because that national chain of subway is so, so popular.

04:31 I'm from the midwest, guys.

04:33 That's why i gave that example...

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