Cambridge International as and a level Economics Ebook

Barrier to exit: 
any restriction that prevents a firm leaving 
a market.
KEY TERM
167
Chapter 7: The price system and the microeconomy 

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This gives the firm greater market power because 
consumers do not see the rival firm’s product as a close 
substitute on account of extensive persuasive advertising.
■ 
Economies of scale can be a barrier because the existing 
large producers are able to produce at a lower average cost 
than those just starting up. They also give large firms an 
opportunity to cut their price in order to eliminate any high-
cost producers. This is the concept of predatory pricing, 
which can be used to eliminate any new firms that do enter 
the industry.
■
The production process or the products of a firm may be 
protected by a legal monopoly in the form of a patent, 
whereby competitors cannot copy without the permission 
of the owner. The idea is to guarantee a reward to 
entrepreneurs with original ideas for a reasonable period 
of time. The barrier here is access to either technology or 
information.
■ 
Some existing firms may have monopoly access to raw 
materials, components or retail outlets, which will make 
it diff icult for new entrants to make an impact. Vertically 
integrated manufacturing businesses, where a firm is a 
specialist in diff erent stages of production, will be protected 
by the fact that their rivals’ costs will be higher.
■ 
In activities such as consumer electronics, the pace of product 
innovation is so rapid that the existing firms will be working on 
the next generation of products while launching the current 
range. Unless the new entrants have original ideas or can 
exploit a new market segment, they are destined to fail.
■ 
It may be possible for existing firms to hide the existence of 
abnormal profit by what is called