Market barriers in the market. Entry and exit barriers
Enterprises that are potentially ready to enter the market of goods and services should clearly realize that their appearance on the market will inevitably lead to a redistribution of the market (or its segment), sharpening and lowering prices.
The reality of penetration of new enterprises into the market depends on the level of entry barriers that prevent such penetration. The nature of the barriers can be different. They may be due to a high level of capital intensity, as a result of which the enterprise saves on scale of production (automotive industry), tariff discounts (air transportation), territorial location of stores ( retail), "natural monopoly", (gas and water supply, energy).
entry barriers
Entry barriers include control over limited types of economic resources, the best distribution channels, criminal influence on the market, including the division of spheres of influence between criminal structures.
Entry barriers are also erected when obtaining, issuing patents and licenses by the state. The absence of a patent deprives the inventor of any privileges. This is how the legal nature of this barrier is manifested: if there is a patent, there is a right; if there is no patent, there are no rights.
The barriers associated with scientific and technological achievements have not only a legal, but also an economic component. Their owner has unique knowledge that is not available to competitors, regardless of legal regulations, but simply because only the inventor knows all the details of the innovation. This special knowledge ("know-how") protects the inventor's monopoly on innovation.
Certain government policies can also give rise to a monopoly. Thus, the introduction of import duties limits competition from foreign firms and stimulates the monopolization of the domestic market.
Competition takes on a pronounced aggressive character when, with the advent of new types of goods, new market segments are formed, penetration into which can bring high profits. Under these conditions, larger enterprises, seeking to increase their market share, act aggressively, buying up smaller enterprises, introducing new technologies to them and expanding the production of products under their own brand.
Entry barriers keep new competitors from trying to establish themselves in the market. The point is to make the costs of market penetration so high that the very return on investment is jeopardized. Thus, barriers to entry exist to increase entrepreneurial risk for potential competitors.
exit barriers
Competition is most fierce in depressed industries with high exit barriers; when the costs of leaving the market (preservation of production, payment of compensation to dismissed personnel, etc.) exceed the costs associated with the continuation of competition. Exit barriers also condition the persistence of monopolies, as they force economic units to continue to operate in industries where profitability is low or there is no return on capital (shipbuilding, steel industry).
Examples of exit barriers are:
- the need to write off large investments;
- unwillingness to lose their image;
- ambition of the manager;
- government intervention;
- trade union opposition;
- supplier and customer protests.
Thus, exit barriers can be socio-political, economic and emotional in nature. The latter concerns a situation where enterprises that succeed in new industries stubbornly hold on to their old business, despite the losses. Such cases are rare, but they usually create serious difficulties for enterprises that are formed in the respective industries.
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Introduction……………………………………………………………………....3-5
1.Theoretical aspects market entry and exit barriers……5
1.1. The concept of barriers, their essence, content and types……………….5-7
1.2. Conditions for the emergence and economic nature of barriers……..7-10
2. Barriers to market entry and exit as behavioral factors
firms……………………………………………………………………...11-14
2.1. Positive returns to scale and minimally efficient
release……………………………………………………………………..14-16
2.2 Functioning of barriers in conditions of vertical integration and
differentiation activities of the firm…………………………..16-18
2.3. Height and effectiveness of barriers………………………………………………………………………………………………………………………………………………………..18-20
Conclusion…………………………………………………………………21-22
Literature…………………………………………………………………..23
Introduction.
“The development of the Russian economy poses new challenges for economists, and, consequently, new challenges arise for vocational training economists. Until now, the predominant discipline of the fundamental, training of economists, remained courses in general economic theory in the form of micro- and macroeconomics, but now a good theoretical basis is also required in special areas. One of these areas of fundamental economic theory is the economic theory of markets - the science of the methods of formation, types and economic consequences of the functioning market structures, which includes features of the behavior of enterprises at the level of individual industries and regions. This theory shows how this or that behavior of an economic entity develops, how it is modified depending on the real and intended actions of other economic agents, including the state. Market theory provides a classification of market structures, methods for assessing the strength of an economic agent's influence on market parameters. This theory is of particular importance from the point of view of conducting an effective industrial and antimonopoly policy of the state. one
aim term paper is to study the emergence and nature of market entry and exit barriers, to conduct a comparative analysis of the significance of different types of barriers for the economy.
1. Get acquainted with the concepts of barriers, their essence and types.
2. Consider the factors of the firm's behavior in various economic conditions.
one . Avdasheva S.B., Rozanova N.M., Theory of organization of branch markets. M., 1998., Ch.2. pp.38-64
3. Compare and classify types of industries according to the height and effectiveness of barriers to entry.
The theory of the organization of market structures is a relatively new area of economic theory, especially rapidly developing at the present time. As the name suggests, the theory deals with the organization of individual markets and industries, studies the activities of firms.
I . Theoretical aspects of market entry and exit barriers.
1.1. The concept of barriers, their essence, content and types.
Market- is a system of relations in which the bonds of buyers and sellers are so free that the prices of the same product tend to quickly equalize.
Market- represents a set of buyers and sellers, the interaction of which leads to the possibility of an exchange.
Market It is a mechanism for the transfer of ownership.
The definition of a specific market is related to the purpose and methodology of the study. The first step is to define the boundaries of the market. Usually in the scientific literature there are the following border types :
1) Product boundaries- reflect the ability of goods to replace each other in consumption
2) Temporary boundaries- characterize the studied time interval, as well as the boundaries of the operation of the goods being sold
3) Local borders- define the spatial boundaries of the market. Such boundaries depend on the severity of competition in the national and competitive market, as well as on the size of entry barriers to regional market external sellers.
It is necessary to make a clear distinction between the market and the industry.
Industry- a set of enterprises that produce similar products using similar resources and similar technologies.
The market is united by a satisfied need. Industry - the nature of the technologies used.
The structure of the market is determined by the number and size of firms, the nature of products, the ease of entry and exit from the market, and the availability of information.
Usually in the economic literature four types of market structures are considered (perfect competition, monopolistic competition, oligopoly, monopoly).
Market Entry Barriers- factors of an objective and subjective nature, due to which it is difficult and sometimes impossible for new firms to start a business in the chosen industry; as a result, existing firms need not be afraid of competition.
Non-strategic entry barriers- are created by the fundamental conditions of the industry and are generally independent of the activities of the firm or weakly influenced by it.
Strategic barriers to entry- are created by the firm itself as a result of the implementation of its purposeful policy.
Market exit barriers- leaving the industry in case of failure is associated with significant costs, which means that the risk of activity in the industry is too high, so the probability of a new seller entering the industry will be small
“Barriers to market entry and exit are the most important characteristics of market structure. Market entry barriers are factors of an objective or subjective nature, due to which it is difficult and sometimes impossible for new firms to start a business in a chosen industry.
Thanks to such barriers, firms already operating in the market can not be afraid of competition. The presence of a barrier to exit from the industry leads to the same results. If exiting the industry in the event of a market failure involves significant costs (for example, the production of a product requires highly specialized equipment that would not be easy to implement in the event of a bankruptcy of the company) - therefore, the risk of operating in the industry is high - the probability of a new seller entering the market is relatively low ." 2
It is the presence of barriers to entry, combined with a high level of producer concentration in an industry, that enables firms to raise prices above marginal cost and earn positive economic profit not only in the short term, but also in long term, which determines the bargaining power of these firms. Where barriers to entry do not exist or are weak, firms, even when market concentration is high, must take into account competition from actual or potential rivals.
1.2. Conditions for the emergence and economic nature of barriers.
An attempt to explain the phenomenon of the fact that in certain industry
2. Firm as an economic agent // Textbook on the basics of economic theory. M. 1994. S. 133 - 164
markets, firms consistently and systematically have higher rates of return than firms in other industries suggests that there may be barriers to new firms entering the market, preventing them from taking advantage of favorable market conditions.
D. Bain gave the name to this phenomenon entry barrier, allowing incumbent firms to earn excess profits without fear of entry by competitors. Chamberlin's work also explored the issues of potential competition and the difficulties associated with it for firms to enter an industry market. They showed the decisive role of the degree of difficulty in entering the market in establishing the relationship between the firm's cost and revenue curves. Later, the work of other economists appeared.
As a result of studies of this problem, various economists have proposed alternative interpretations of barriers to entry. Their review is presented in the work of A. Shastitko. So, in accordance with the approach of D. Bain, an entry barrier exists if new firm cannot achieve the same level of post-entry profitability that existing firms had before they entered the market.
It should be noted that D. Bain considers not all as potential firms, but only those that have the same advantages in order to qualify for entry into the industry.
Later, D. Stigler proposed to determine the barriers based on
asymmetries in the behavior of existing and entering the market firms.
Detailing this definition, S. Weizsacker considered barriers to entry as production costs that a company must bear, seeking to enter the industry market, and are not borne by existing
“Barriers can be generated by the objective characteristics of the industry market related to the production technology, the nature
consumer preferences, demand dynamics, foreign competition, etc. Such barriers are referred to as non-strategic factors of the market structure. Another type of barriers are barriers caused by the strategic behavior of firms operating in the market (strategic pricing that limits the entry of potential competitors into the industry, strategic policies in the field of research and innovation spending, patents, vertical integration and product differentiation, etc.). 3
Freedom of entry and exit from the industry market plays a big role in determining the market structure and the subsequent functioning of firms. In different industry markets, the height and duration of entry-exit barriers vary. The degree of freedom to enter and exit the market is also a variable and largely determines the dynamics of firms in the markets, which, in turn, can have different results. Some markets are very dynamic, others are more stable and the number of firms operating in them changes little.
The entry of new firms into the market can cause changes in the market situation, namely increased competition and pressure on firms already operating in the market in the direction of need.
3 Tyrol J. Markets and Market Power St. Petersburg, 1996. P.340-347.
increasing production efficiency, i.e. force them to adapt to changes or look for other, more adequate markets for them. The entry of new firms may also facilitate the introduction of new products and technologies.
The conditions for firms to enter the market are determined by various factors, and therefore entry barriers are classified by type. In particular, the dominant position of the firm in the market can be used by it to create strategic barriers.
and monopolistically high prices. Many Russian industry markets are widely represented, for example, by administrative
rative barriers to entry, which is a specific feature of the country's economy. In this regard, we will consider in this chapter the nature and types of barriers to entry into the industry, different types structural barriers and factors affecting the entry and exit of firms.
Chapter II . Market Entry and Exit Barriers as Factors in Firm Behavior
Market entry and exit barriers are the most important characteristics of the market structure.
“Barriers to Market Entry- such factors of an objective or subjective nature, due to which it is difficult, and sometimes impossible, for new firms to start a business in the chosen industry. Thanks to these kinds of barriers, firms already in the market do not have to fear competition.” four
The presence of a barrier to exit from the industry leads to the same results. If exiting the industry in the event of market failure comes at a significant cost.
Market entry barriers can be divided into two groups: strategic and non-strategic barriers. Consider first non-strategic barriers.
To non-strategic barriers market entry and exit include the following factors:
1. positive returns to scale and minimally efficient output;
2. vertical integration;
3. diversification of the company's activities;
four . Avdasheva S.B., Rozanova N.M., Theory of organization of branch markets. M., 1998., Ch.2. pp.38-64.
4. product differentiation;
5. elasticity and growth rates of demand;
6. foreign competition;
7. institutional barriers
« Strategic (subjective) barriers are created by the conscious activity of the firms themselves, by strategic behavior that prevents new firms from entering the industry. These include such activities of firms as: saving innovations, long-term contracts with resource suppliers, obtaining licenses and patents for this type of activity, maintaining unloaded capacities, as well as all ways to increase the minimum effective output for the industry - increasing advertising and R & D costs. , marketing research, the costs of creating the company's image. 5
Strategic barriers can also manifest themselves in pricing and marketing policies, the specifics of the activities of manufacturers as holders of patents, licenses, trademarks. Strong business relationships and informal relationships with suppliers of resources and buyers of goods also plays the role of a strategic barrier. Large size of economic turnover and well-functioning manufacturing process allow the creation of spare capacity that can be used for price competition and rapid expansion into unoccupied market segments, as well as the use of a variety of agreements 5 Baye M.R. Management economics and business strategy. M., 1999. Ch. 7. Economic entity industries. pp. 288-309.
and preferential settlements with suppliers and consumers, thereby pushing competitors aside.
Effectiveness of strategic barriers
The concept of the effectiveness of barrier-to-entry policies is based on the fact that the strategy of discouraging entry of new firms is associated with certain costs for firms in the industry. It can be
costs associated either directly with pricing policy- relative price cuts to eliminate potential competition, or with various methods of non-price competition (investment in capacity, spending on creating a "redundant" distribution network, spending on quality improvement to create a reputation effect, etc.).
The effectiveness of strategic barriers to entry is determined by comparing the profit of the firm, obtained by abandoning the policy of barriers, with the profit possible if appropriate measures are taken to block the entry of new sellers into the market.
Let the firm earn economic profit in the current period. If the firm does not take care of entry barriers, new firms will enter the market, competition will arise, and economic profit will fall to zero.
2.1. positive returns to scale and minimally efficient output
Positive returns to scale create objective barriers to entry for potential competitors due to the cost advantage of large producers. An indicator characterizing barriers to entry,
caused by positive returns to scale, is the so-called minimum efficient output (MEW, MES).
Minimum effective release- this is the level of output at which positive returns to scale are replaced by constant or decreasing, the firm reaches a minimum level of long-term average costs.
The number of firms operating in an industry in a state of long-run equilibrium is determined by the ratio of market demand at a price equal to the minimum long-run average cost to the minimum efficient output (assuming that production function and the cost structure of all firms in the industry is identical).
n is the number of firms in the industry;
Qd- market demand by price;
minLRAC - costs per unit of production;
q is the minimum efficient output.
If there are more than n firms in the industry, at least some of them will produce goods at costs greater than the minimum value of long-term average costs, and price competition between them will lead to a price reduction to the level of the minimum.
low average cost, so that a number of firms will suffer losses and be forced to stop production.
Additional information needed to draw a conclusion about the height of barriers to entry into the industry is the indicator of cost advantage - the ratio medium size value added per worker large enterprises to the corresponding indicator for small enterprises in the industry. Studies by Western scholars have shown that a high minimum efficient volume of output only creates significant barriers to entry into the industry when the indicator of the advantage of large enterprises in costs is above 1.25.
2.2. The functioning of barriers in the context of vertical integration and differentiation activities of the firm.
Vertical integration implies that a firm operating in this market, is also the owner of either the early stages of the production process (integration of the first type, integration of resources), or the later stages (integration of the second type, integration of the final product).
An example of the first type of vertical integration would be an automobile manufacturing firm that owns a steel mill that serves its steel needs. An example of vertical integration of the second type is an oil refinery that owns a network of gas stations.
Vertical integration provides the firm with more market power than the market power that the firm would have on the basis of
of their sales in that market. A vertically integrated firm has additional competitive advantages. for it can lower the price of the commodity more, or make more profit at a given price, by lowering the cost of either purchasing the factors of production or selling the final product.
Vertical integration creates barriers to entry, not only due to the cost advantage of already existing sellers in the market. An important consequence of integration is the increase in the influence of sellers on the market.: if one of the firms operating in the market is the largest owner of the factors of production or controls the sale end products, having the widest distribution network, it is more difficult for new firms, especially if they are not integrated, to gain access to this market.
If, however, a potential competitor must pursue a policy of vertical integration in order to successfully enter the market, he faces the problem of attracting financial resources.
3. Diversification of the company's activities
Diversification reflects the distribution of a firm's output among different target markets. A diversified firm is usually larger than an undiversified one. This either raises the industry's minimum efficient output, making it harder for new firms to enter, or the firm has a cost advantage, which also strengthens its bargaining power.
Diversification of activities allows the firm to reduce the risk of managing associated with a particular market. A diversified firm is more resilient due to the ability to compensate for the possible losses that the company suffers in another market with profits from activities in one market. In addition, the mere fact of having a diversified company in an industry deters potential competitors, as they are aware of its ability to compete longer and harder.
On the other hand, diversification is used as a method of entering new markets, reducing the risk of bankruptcy and the degree of dependence on the economic environment.
2.3 Height and effectiveness of barriers
J. Bain singled out four types of industries according to the height and effectiveness of barriers to entry. His classification has become generally accepted in the theory of the organization of industrial markets:
1. Markets with free entry: firms already operating in the market
do not have any advantages over the potential
our competitors. In markets with free entry, full mobility of resources is ensured, the price in the industry is set at the level
marginal costs.2. Markets with inefficient barriers to entry: firms in the industry can use various methods of price and non-price policy to prevent the entry of outsider firms, but this
politics will not be preferable for them to a policy of making a profit in the short run.3. Markets with effective barriers to entry: the ability to discourage entry of new firms is combined with the preference for such
kind of policy for firms operating in the industry.4. Markets with blocked entry: the entry of new firms into the market
completely blocked by old firms both in the short and long term
urgent periods.Obviously, the study of the first and fourth types of markets is interesting, but even more fruitful in theoretical and practical terms is the study of the second and third situations. It is easy to see that in the markets of the "intermediate" type, the presence or absence of strategic barriers to entry into the industry will depend on a number of indicators characterizing the position of firms.
“The concept of the effectiveness of barrier-to-entry policies is based on the fact that the strategy of preventing the entry of outsider firms is associated with certain costs for firms operating in the industry. These can be costs associated either directly with pricing policy - lowering prices to eliminate potential competition, or with various methods of non-price competition (investment in capacity, expenses for creating a "redundant" distribution network, expenses for improving quality to create a reputation effect, etc.). d.). In the first case, the costs of creating barriers to entry can be considered as implicit, in the second case
How obvious. In any case, the profit of the firm (firms) that implements the policy of creating barriers to entry will be less than the profit of the firm that does not practice strategic behavior. The effectiveness of strategic barriers to entry is determined by comparing the profit of the firm obtained by abandoning the policy of barriers with the profit possible under the condition
implementation of appropriate measures that block the entry of new sellers into the market.” 6
6 Gruzinov V.P., Gribov V.D. Enterprise Economics: Proc. Benefit. - 2nd ed.. add. - M .: Finance and statistics, 2002. - 208s: ill
Conclusion
Empirical studies of barriers to market entry in modern theory focuses on two aspects:
The impact of barriers to entry on the scale and speed of entry of new competitors into the market;
The impact of barriers to entry on the size of the economic profits of firms operating in the market.
The main purpose of the analysis is to compare the significance of different types of barriers for the economy as a whole, as well as for various industries.
One of the first studies of the dependence of earnings per dollar of equity capital on various factors reflecting the height of barriers to entry was carried out by W. Commander and T. Wilson 9 for 41 US industries. Their analysis showed that the most important factor that increases earnings per dollar of equity is an increase in the share of advertising expenses in the firm's revenue. Earnings per dollar of equity depended much weaker on the size of capital and even weaker on the rate of growth in demand.
D. Orr, based on an analysis of 71 industries in Canada, where high profitability served as an incentive for the entry of new firms, showed that the main factors discouraging entry are (in decreasing order of influence): the concentration of sellers already operating in the market; absolute value capital; high share of advertising expenses in the amount of revenue; industry risk indicator; high share of R&D expenses in revenue. M. Porter (USA) pointed out the differences in the factors that determine the value of the return on capital for firms that are leaders in
determining the price or volume of sales and for outsider firms "agreeing with the price" of the leader.
For leading firms, a positive dependence of return on capital on concentration and on product differentiation was established, and no dependence on the volume of capital use and the growth rate of demand was established; for firms-followers ("agreeing with the price"), a positive dependence of profit on capital on the volume of capital use and on the capital intensity of products is established.
Thus, we see that the structure of the market is a more complex concept than it seems at first glance. The structure of the market has many facets, which is reflected in its various indicators. We reviewed the indicators of the concentration of sellers in the market and discussed their main properties. The value of the concentration of sellers in the market is extremely important for determining the market structure. However, the concentration of sellers by itself does not determine the level of monopoly power- the ability to influence the price.
Only with sufficiently high barriers to entry into the industry can the concentration of sellers be realized in monopoly power - the ability to set a price that provides a sufficiently high economic profit. We have characterized the main types of barriers to entry into the industry, mainly non-strategic barriers that do not depend on the conscious actions of firms.
We have considered the main indicators that characterize the level of monopoly power in the markets and the problems associated with their measurement.
Market structure is not an exogenous factor in the economy and is influenced by the behavior of firms operating in the market. In what follows, we will consider how the strategic pricing and non-pricing policies of firms affect market characteristics.
Literature
1. S.B. Avdasheva, N.M. Rozanova "Theory of organization of industry markets" Textbook- M: ICHP "Publishing house Master", 1998-320 p.
2. Baye M.R. Management economics and business strategy. M., 1999. Ch. 7. The economic essence of the industry. pp. 288-309.
3.Vuros A., Rozanova N. Decree. Op. pp.220-221.
4. Gruzinov V.P., Gribov V.D. Enterprise Economics: Proc. Allowance -2nd ed. Add.-M.: Finance and statistics, 2002 -208 pp.: ill.
6. Tyrol J. Markets and Market Power St. Petersburg, 1996. P. 340-347.
7. Ed. Terekhina V.I. Financial management firm M.: Economics, 1998 P. Sheremet A.D., Saifullin R.S. Finance of enterprises, M.: INFRA-M. 1998
9.Finance, ed. Prof. L.A. Drobozina M.: UNITY, 20
10. Sherer F.M., Ross D. Structure of industry markets. M., 1997. S. 15-27. , Ch. 3 pp. 55-85.
11.Economic school. Issue 4. 1998. S. 286.
12. School of Economics. Issue 4. 1998. S. 287.
13. Enterprise Economics: Exam answers, edited by A.S. Pelpha. Rostov-on-Don: "Phoenix", 2002-416 p.
Economic School. Issue 4. 1998. S. 286.
2. School of Economics. Issue 4. 1998. S. 287.
3. Sherer F.M., Ross D. Structure of industry markets. M., 1997. S. 15-27. , Ch. 3 pp. 55-85.
4. Tyrol J. Markets and market power, St. Petersburg, 1996, pp. 340-347.
5. Kirtsner I.M. Competition and entrepreneurship. M.: 2001. Ch..3. Competition and monopoly. pp. 93-133.
6. Baye M.R. Management economics and business strategy. M., 1999. Ch. 7. The economic essence of the industry. pp. 288-309.
7. S.B. Avdasheva, N.M. Rozanova "Theory of organization of industry markets" Textbook- M: ICHP "Publishing house Master", 1998-320 p.
8. Firm as an economic agent// Textbook on the basics of economic theory M. 1994. S. 133-164.
9. Enterprise Economics: Exam answers, edited by A.S. Pelpha. Rostov-on-Don: "Phoenix", 2002-416 p.
10. Gruzinov V.P., Gribov V.D. Enterprise Economics: Proc. Allowance -2nd ed. Add.-M.: Finance and statistics, 2002 -208 pp.: ill.
11.Finance, ed. Prof. L.A. Drobozina M.: UNITY, 20
12. Ed. Terekhina V.I. Financial management of the company M.: Economics, 1998 P. Sheremet A.D., Saifullin R.S. Finance of enterprises, M.: INFRA-M. 1998
Market entry and exit barriers are the most important characteristics of the market structure.
Market Entry Barriers- such factors of an objective or subjective nature, due to which it is difficult and sometimes impossible for new firms to start a business in the chosen industry. Thanks to such barriers, firms already operating in the market can not be afraid of competition.
The presence of a barrier to exit from the industry leads to the same results. If exiting the industry in the event of market failure comes at a significant cost.
It is the presence of barriers to entry, combined with a high level of concentration of producers in the industry, that enables firms to raise prices above marginal costs and receive positive economic profits not only in the short but also in the long run, which determines the bargaining power of these firms.
Market entry barriers can be divided into two groups: strategic and non-strategic barriers. Consider first non-strategic barriers.
To non-strategic barriers market entry and exit include the following factors:
1. positive returns to scale and minimally efficient output;
2. vertical integration;
3. diversification of the company's activities;
4. product differentiation;
5. elasticity and growth rates of demand;
6. foreign competition;
7. institutional barriers.
1. positive returns to scale and minimally efficient output
Positive returns to scale create objective barriers to entry for potential competitors due to the cost advantage of large producers. An indicator that characterizes the entry barriers caused by positive returns to scale is the so-called minimum efficient release (MEV, MES).
Minimum effective release- this is such a volume of output at which positive returns to scale are replaced by constant or decreasing, the firm reaches a minimum level of long-term average costs.
The number of firms operating in the industry in a state of long-term equilibrium is determined by the ratio of the volume of market demand at a price equal to the minimum value of long-term average costs to the minimum effective output (assuming that the production function and cost structure of all firms in the industry are identical).
Where
n is the number of firms in the industry;
Qd - market demand for price;
min LRAC - unit costs;
q is the minimum efficient output.
If there are more than n firms in the industry, at least some of them will produce at a cost greater than the minimum long-run average cost, and price competition between them will drive the price down to the minimum average cost, so that a number of firms will suffer losses and be forced to cease production.
Additional information needed to draw a conclusion about the height of barriers to entry into the industry is the indicator of cost advantage - the ratio of the average value of added value per operating large enterprises to the corresponding indicator for small enterprises in the industry. Studies by Western scholars have shown that a high minimum efficient volume of output only creates significant barriers to entry into the industry when the indicator of the advantage of large enterprises in costs is above 1.25.
2. Vertical integration
Vertical integration assumes that a firm operating in a given market is also the owner of either the early stages of the production process (integration of the first type, integration of resources) or the later stages (integration of the second type, integration of the final product).
An example of the first type of vertical integration is an automobile manufacturing firm that owns a steel foundry that serves its steel needs. An example of vertical integration of the second type is an oil refinery that owns a network of gas stations.
Vertical integration provides the firm with greater market power than the market power that the firm would have based on its sales in that market alone. A vertically integrated firm has additional competitive advantages. for it can lower the price of the commodity to a greater extent, or make a greater profit at a given price, owing to lower costs, either in the purchase of factors of production or in the sale of the final product.
Vertical integration creates barriers to entry, not only due to the advantage of sellers already operating in the market in terms of costs. An important consequence of integration is the increase in the influence of sellers on the market: if one of the firms operating in the market is the largest owner of the factors of production or controls the sale of the final product, having the widest distribution network, it is more difficult for new firms, especially if they are not integrated, to gain access to this market. If, however, a potential competitor must himself pursue a policy of vertical integration in order to successfully enter the market, he faces the problem of attracting financial resources.
3. Diversification of the company's activities
Diversification reflects the distribution of a firm's output among different target markets. A diversified firm is usually larger than a non-diversified one. Because of this, the minimum effective output in the industry rises, which makes it difficult for new firms to enter, or the given firm has cost advantages, which also strengthens its market power.
Diversification of activities allows the firm to reduce the risk of managing associated with a particular market. A diversified firm is more stable due to the ability to compensate for the possible losses that the company suffers in another market with profit from activities in one market. In addition, the mere fact of having a diversified company in an industry deters potential competitors, as they are aware of its ability to compete longer and harder.
On the other hand, diversification is used as a method of penetrating into new markets, reducing the risk of bankruptcy and the degree of dependence on the economic environment.
4. Product differentiation
Product differentiation means a variety of products that satisfy the same need and have the same basic characteristics. Firms producing a differentiated product do not cease to belong to the same market. Examples of product differentiation are different brands cigarettes, cars, household appliances. Differing in packaging, labeling, minor internal modifications, the goods continue to refer to the same presentation.
Product differentiation creates additional barriers to entry into the industry, as it creates the attractiveness of a particular brand of product for a particular category of consumers (the so-called brand loyalty), as a result of which new firms have to overcome stereotypes of consumer behavior. It is especially difficult for new firms in the context of aggressive advertising of companies already operating on the market: the minimum effective volume of output should increase due to the fact that fixed costs grow due to the inclusion of additional costs for advertising.
5. Elasticity and growth rates of demand
Demand characteristics are also part of market structures and can create entry barriers to the industry, as they are largely outside the control of firms, but influence their behavior, primarily by limiting their degree of freedom in setting prices.
The level of concentration is in the opposite dependence on the growth rate of demand: the higher the growth rate of demand, that is, the faster the scale of the market increases, the easier it is for new firms to enter the industry, and the lower the level of concentration will be, and therefore, the higher the degree market competitiveness.
The price elasticity of demand limits the excess of price over marginal cost available to firms operating in markets with imperfect competition. If demand is inelastic, firms can increase price relative to cost to a greater extent than when demand is elastic. In addition, the lower the elasticity of demand, the easier it is for the dominant firm to both restrict entry into the industry and earn economic profits.
6. Foreign competition
Under the conditions of an open economy and liberalization of foreign trade, foreign competition plays the role of a factor that reduces the level of concentration in the industry of the monopoly power of market agents and the degree of market imperfection. The height of barriers to entry into the industry depends on the rate of import tariffs - the lower the import tariff, the lower the barriers to entry into the industry for a foreign competitor.
Attention should be paid to the features of measuring well-being in an open economy: one can measure the well-being of society on the scale of the entire “world”, or one can limit oneself when measuring well-being to the scale national economy. In the latter case, tariffs and subsidies will have a contradictory effect on the level of well-being, if domestic market there is imperfect competition and domestic firms in a closed economy would receive economic profits.
Under these conditions, the import tariff leads, on the one hand, to an increase in the equilibrium price and a reduction in the consumer gain, on the other hand, to an increase in sales and profits of the domestic firm.
7. Institutional barriers
Institutional barriers to market entry and exit can serve as significant barriers preventing potential competitors from entering the market. The institutional barriers to entry into the market include the system of licensing the activities of firms, the system state control over prices, over the level of profitability. State pricing of goods or limitation of the firm's profitability can lead to the appearance of implicit costs expressed in the loss of part of the potential profit.
The institutional barriers to exit from the industry should include the costs associated for the owners of the company with the procedure for terminating activities and bankruptcy. According to many researchers Russian markets, the complexity of the exit of enterprises from the industry and the high explicit and implicit costs associated with it, is one of the most important factors hindering effective competition. The high risk associated with the difficulty of exiting the market serves as a factor discouraging the entry of potential competitors into the industry.
Another type of barriers - barriers caused by the strategic behavior of firms operating in the market.
Strategic (subjective) barriers are created by the conscious activity of the firms themselves, by strategic behavior that prevents new firms from entering the industry. These include such activities of firms as: saving innovations, long-term contracts with resource suppliers, obtaining licenses and patents for this type of activity, maintaining unloaded capacities, as well as all ways to increase the minimum effective output for the industry - increasing advertising and R & D costs. , marketing research, costs of creating the company's image.
Strategic barriers can also manifest themselves in pricing and marketing policies, the specifics of the activities of manufacturers as holders of patents, licenses, trademarks. The presence of strong business ties and informal relationships with resource suppliers and buyers of goods also plays the role of a strategic barrier. The large size of the economic turnover and a streamlined production process make it possible to create reserve capacities that can be used to maintain price competition and rapid expansion into unoccupied market segments, as well as to use a variety of agreements and preferential settlements with suppliers and consumers, thereby pushing competitors.