Question

(A) How would you define a barrier to entry? Are returns to scale a barrier to entry? Why or why not?
(B) Give three reasons, many economists (including MacGee) believe that predation is rare.

Answer 1

(A) a barrier to entry refers to the tactics used by the incumbent firms to avoid new entrant from competing in the goods market. It can also be due to the kind of market structure which results in the restricted entry of new firms. One common example is a natural monopoly when a firm serves the entire market mostly resources and the firm exercises economies of scale and no other firm can enter without facing cost disadvantage.

(B) Theories predict that predatory pricing is irrational and should be rare. The three essentials of applying predatory pricing involve; one, a firm should be among the dominant firms. Second, pricing strategy should involve charging below costs which implies losses. Third, a special market environment where firms would find difficult to enter or reenter when the dominant firm has eliminated all existing competitors and is able to recoup initial losses.