Question

Under what conditions do economies of scale serve as an entry barrier?

And do the same conditions apply to learning curves?

Answer 1

Scale economies and externalities of the network are two types of entry barriers. They discourage potential competitors from entering a market, thereby contributing to some firms ' monopolistic power. Scale economies are cost advantages that large firms gain because of their size. They arise because the price per production unit falls with increasing scale, because fixed costs are spread over more output units. Size savings are also achieved by large-scale acquisitions of long-term contract products, increased managerial specialization, the ability to obtain lower interest rates while lending from banks, exposure to a wider range of financial instruments

Scale economies could act as an entry obstacle if the incumbent's investment is a sunk cost. When competition intensifies, incumbent is unlikely to quit. If the investment is not a sunk cost (reversible funds, general purpose assets), then even if there are economies of scale, there will be no entry barriers. The results of learning curves are close to the effects of dropping prices. The high production costs during the learning period can act as a barrier to entry, just as sunk cost investments do