The importance of entry and to deter entry in case of firms in Essay

The importance of entry and to deter entry in case of firms in different market structures - Essay Example h barriers to entry as it is necessary to prove that in monopoly a firm enjoying a high percentage of market shares can translate it into market power (ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT, 2007, p. 1). Both Walmart and Loblaw are engaged in same type of business activities. They will engage themselves in activities that will prevent entry of competitors. If the two competitors compete between themselves they will end up in creating barriers that will not enable themselves to diversify their business. In fact this will not be desirable outcome from the firms’ point of view and consumers’ welfare will get affected (Carlton, 2005, p.9). Strategies used by firms to deter entry The incumbent firm can involve itself in three types of strategies to deter entry. They are: Limit Pricing, Predatory pricing and capacity expansion. The strategy of limit pricing is illegal in many countries. A limit price is a strategy mainly used by the monopolists to deter entry . They used to set a price that would be faced by the entrant on entry into the market until the existing firm did not act to decrease the output. The limit price is generally set at a level which is less than the average cost of production. It can also be set at the level where entry is just not profitable. This discourages the new entrants (Roberts and Milgrom, 1982, p. 444). The second strategy is used by the incumbent by charging a price that is low relative to the price of the other products before the entry takes place. Often it appears that other firms who initially were not in the market of a certain product express their opinion to enter the market. It is the price of the product that influences their decisions. The already existing firms in the market can discourage the new entrants by... The incumbent firm can involve itself in three types of strategies to deter entry. They are Limit Pricing, Predatory pricing and capacity expansion. The strategy of limit pricing is illegal in many countries. A limit price is a strategy mainly used by the monopolists to deter entry. They used to set a price that would be faced by the entrant on entry into the market until the existing firm did not act to decrease the output. The limit price is generally set at a level which is less than the average cost of production. It can also be set at the level where entry is just not profitable. This discourages the new entrants.The second strategy is used by the incumbent by charging a price that is low relative to the price of the other products before the entry takes place. Often it appears that other firms who initially were not in the market of a certain product express their opinion to enter the market. It is the price of the product that influences their decisions. The already existing f irms in the market can discourage the new entrants by charging a low price for the products. Thus the potential entrants can be ignored and their consumer base will not be affected. If the potential entrants find it unsustainable to continue to operate in the market, they tend to move out of the business which provides a wider consumer base for the existing firms. Then the incumbent can raise the prices of the product and exploit the market power.