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Industrial Organisation 2022

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Pregunta:

Why is economies of scale, the shape of LRAC and location of MES a barrier of entry?

Autor: Hjalmer Pedersen



Respuesta:

If MES is very large relative to total market output, firm must get a big market share to be able to produce at MES  most extreme case when LRAC is always decreasing for all possible output sizes: natural monopoly. Hence, if new firms want to enter the market they will already be at a disadvantage as they are not able to capture enough market share hence their LRAC will be too high, and they will not be able to compete as they produce below MES. The costs for output below MES are substantially higher than output at MES.


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If MES is very large relative to total market output, firm must get a big market share to be able to produce at MES  most extreme case when LRAC is always decreasing for all possible output sizes: natural monopoly. 

Hence, if new firms want to enter the market they will already be at a disadvantage as they are not able to capture enough market share hence their LRAC will be too high, and they will not be able to compete as they produce below MES. The costs for output below MES are substantially higher than output at MES.
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