barriers to exit

Examples of barriers to exit in the following topics:

• Entry and Exit of Firms

  • The absence of barriers of entry and exit is a necessary condition for a market to be perfectly competitive.
  • Barriers to entry and exit are an important characteristics to consider when analyzing a market.
  • In perfectly competitive markets, there are no barriers to entry or exit.
  • These types of barriers, defined below, prevent free entry to or exit from markets.
  • The factors that may form a barrier to exit include:

• Definition of Perfect Competition

  • Barriers to entry and exit exist, and, in order to ensure profits, a monopoly will attempt to maintain them.
  • There are relatively insignificant barriers to entry or exit, and success invites new competitors into the industry.
  • Each firm is large enough to influence the industry.
  • Barriers to entry exist.
  • There are no barriers to entry.

• Monopolistic Competition Compared to Perfect Competition

  • Demand curves in monopolistic competition are not perfectly elastic: due to the market power that firms have, they are able to raise prices without losing all of their customers.
  • Both markets are composed of firms seeking to maximize their profits.
  • A final difference involves barriers to entry and exit.
  • Perfectly competitive markets have no barriers to entry and exit; a firm can freely enter or leave an industry based on its perception of the market's profitability.
  • In a monopolistic competitive market there are few barriers to entry and exit, but still more than in a perfectly competitive market.

• Market Power

  • Such firms are often referred to as "price makers. " In contrast, firms with limited to no market power are referred to as "price takers. "
  • Barriers to entry determine how contestable the market is.
  • Even highly concentrated markets may be contestable markets if there are no barriers to entry or exit, which limits a firm's ability to raise its price above competitive levels.
  • Common barriers to entry include control of a scarce resource, increasing returns to scale, technological superiority, and government-imposed barriers.
  • Some of the behaviors that firms with market power are accused of engaging in include predatory pricing, product tying, and creation of overcapacity or other barriers to entry .

• Market Differences Between Monopoly and Perfect Competition

  • Monopolies, as opposed to perfectly competitive markets, have high barriers to entry and a single producer that acts as a price maker.
  • In a perfectly competitive market, there are many producers and consumers, no barriers to enter and exit the market, perfectly homogeneous goods, perfect information, and well-defined property rights.
  • Public utility companies tend to be monopolies.
  • In the case of electricity distribution, for example, the cost to put up power lines is so high it is inefficient to have more than one provider.
  • Monopoly power comes from markets that have high barriers to entry.

• Tariffs

  • Tariffs are taxes levied on goods entering or exiting a country, and have consequences for both domestic consumers and producers.
  • One barrier to international trade is a tariff.
  • This may be done to raise tariff revenue or to restrict world supply of a good.
  • Protective tariffs: Tariffs levied in order to reduce foreign imports of a product and to protect domestic industries.
  • When the tariff is imposed, the domestic price of the good rises to Pt.

• Torricelli's Law

  • Torricelli's law is theorem about the relation between the exit velocity of a fluid from a hole in a reservoir to the height of fluid above the hole.
  • Torricelli's law is theorem in fluid dynamics about the relation between the exit velocity of a fluid from a sharp-edged hole in a reservoir to the height of the fluid above that exit hole .
  • If we assume both the top of reservoir and the exit are open to the atmosphere, the zero for potential energy is at the exit hole, and the fluid velocity at the top of the reservoir is essentially zero (large reservoir, small hole), we arrive at
  • Due to the assumption of an ideal fluid, all forces acting on the fluid are conservative and thus there is an exchange between potential and kinetic energy.
  • The exit velocity depends on the height of the fluid above the exit hole.

• Predatory Pricing

  • Predatory pricing is the practice of selling a product or service at a very low price, with the intention of driving competitors out of the market, or create barriers to entry for potential new competitors.
  • There must be substantial barriers to entry for new competitors for predatory pricing to succeed.
  • So the predator should hope this strategy to works only when it is much stronger than its competitors and when barriers to entry are high.
  • The barriers prevent new entrants to the market replacing others driven out, thereby allowing supra competitive pricing to prevail long enough to dwarf the initial loss.
  • They would exit the market, thinking it is no longer profitable.

• Introduction to Firms with "Market Power"

  • Pure competition results in an optimal allocation or resources given the objective of an economic system to allocate resources to their highest valued uses or to allocate relative scarce resource to maximize the satisfaction of (unlimited) wants in a cultural context.
  • If the firm has is no opportunity to differentiate their product they have no incentive to advertise and to try to influence the demand for their product.
  • The conditions of entry or barriers to entry (BTE) are also important determinants of market power.
  • The monopolist produces a good with no close substitutes (increased probability the demand is relatively inelastic) and there are barriers to entry.
  • Firms in monopolistic competition or imperfectly competitive markets are more likely to have limited market power because there are many firms with differentiated products (there are substitutes) and there is relative ease of entry and exit into the market.

• Entry Barriers

  • One important source of oligopoly power are barriers to entry: obstacles that make it difficult to enter a given market.
  • One important source of oligopoly power is barriers to entry.
  • Barriers to entry are obstacles that make it difficult to enter a given market.
  • Because barriers to entry protect incumbent firms and restrict competition in a market, they can contribute to distortionary prices.
  • For example, requirements for licenses and permits may raise the investment needed to enter a market, creating an effective barrier to entry.