Page 301 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes According to Bain, time duration included in situation of entrance is long in which a special range of
changed condition of demand, procedure prices etc. is merged. This time duration can be of range of 5-10
years. More the time taken by a firm to establish, less will be the fear of entrance. Therefore, the gap between
limit price (P ) and competitor price (P ) will be more. This gap is known as Entry Gap or Entry Barrier.
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To understand basic relation between entry barriers and limit price determination, analysis of Bain has
distributed between Sources of Entry Barriers and Determination of Limit Prices.
Sources of Entry Barriers and Determination of Limit Prices

Bain mentions four main sources of entry barriers: Product Differentiation, Economies of Scale, Absolute
Cost Advantages and more amount of money. Bain includes more amount of money in absolute cost
advantages in his book Industrial Organization. So we are also not mentioning it differently.

Product Differentiation

Product differentiation gives the following ways of an entry barrier of a new firm:
1. Preferences for commodities of established firms.
2. Entrant firm needs to compete with established firms by advertising and big investment, which is
far away from the economic budget of new firm.
3. There should be famous brand for established firms. In this way it can be difficult for new firm to
compete with brand loyalty of customers.
4. If established firms have special sale ways to sale their commodities and have only one purchase
agreement with wholesale buyers, then will face problems in establishing themselves in the new
entrant firm market.
Limit Price Determination—Product differentiation as the entry barrier is explained in Fig. 17.1. Let
the average costs be constant, the cost curve of LAC established firm is long-term average cost curve.
The demand curve of group or the one which Bain called the best firm is DD. P is limit price fixed by
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this firm and Q is limit production. If firm takes P price then demand curve of possible entrant firm
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is D which does not allow it enter in least right market because D curve touches LAC on A point.
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That’s why there is not any production level of firm which is more than the average production cost.
If established firm raise the price to P which is entry inducing price so the production will fall to Q .
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Fig. 17.1

D

P H
Price and Cost P C L A D E D E1 G D LAC
P

O Q Q Q Output
E 1 L

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