Question

7/What is the definition of the term “minimum efficient scale”? In theory, exactly what would it take for a firm to enter the automobile manufacturing industry and compete with GM, Ford, Toyota, and Honda in the U.S. market, and succeed?

8/WHAT ‘BARRIERS TO ENTRY AND SUCCESS’ MUST BE OVERCOME, IN THEORY, FOR A FIRM TO ENTER AND SUCCEED IN THIS MARKET? Please discuss five to ten barriers to entry that, in theory, a firm would have to overcome in order to enter and succeed in this market.

9/Roughly how many cars per year would this new entrant have to produce and distribute and sell, in order to survive in this market? Why?

Answer 1

In industrial organization, the minimum efficient scale (MES) or efficient scale of production is the lowest point where the plant (or firm) can produce such that its long run average costs are minimized.

Barriers to entry are the legal, technological, or market forces that discourage or prevent potential competitors from entering a market. Barriers to entry can range from the simple and easily surmountable, such as the cost of renting retail space, to the extremely restrictive. For example, there are a finite number of radio frequencies available for broadcasting. Once the rights to all of them have been purchased, no new competitors can enter the market.

In some cases, barriers to entry may lead to monopoly. In other cases, they may limit competition to a few firms. Barriers may block entry even if the firm or firms currently in the market are earning profits. Thus, in markets with significant barriers to entry, it is not true that abnormally high profits will attract new firms, and that this entry of new firms will eventually cause the price to decline so that surviving firms earn only a normal level of profit in the long run.

There are two types of monopoly, based on the types of barriers to entry they exploit. One is natural monopoly, where the barriers to entry are something other than legal prohibition. The other is legal monopoly, where laws prohibit (or severely limit) competition.

Types of barriers to entry

Government Regulation

The government may act as a barrier to entry into a certain market through restrictive licensing requirements or limiting the ability to obtain raw materials. Businesses or individuals looking to start a business in a particular field may be required to get a license or other government approval in order to carry on with business. For example, you may want to start your own radio network but upon further research learn there are several government hurdles and costs to attain and broadcast on a particular radio wavelength.

Start-Up Costs

High start-up costs can keep new firms from entering an industry. Can you imagine trying to get into the car manufacturing business? The amount of capital needed to buy the buildings, machinery, pay the workforce, and so on all serve as a barrier to entry.

Technology

Sometimes it is difficult to enter a particular field or business because the technology you need to be successful is protected by a patent. Therefore, you can't use it or are left to try and develop a new technology that may require lots of money to develop.

Economies of Scale

The existence of economies of scale can also be a barrier. Economies of scale are the gains in efficiency and lower production costs that often result from a company growing larger and larger. Since existing firms are already producing, they are often better-positioned to undercut on price. Let's imagine you wanted to start an automobile company. Even if you bought a few buildings, hired a workforce, and obtained the machinery needed, do you think you could produce a similar car at the same cost as Ford, GM, or Toyota?

Product Differentiation

Product differentiation can be accomplished through strong brand recognition, great customer service, or a network effect. If customers perceive existing products as high quality, then a new business owner will need to spend extra money to educate customers about the unique qualities and benefits of its specific products.