Answer to Question #313463 in Microeconomics for Madhuvan

Question

Explain how economies of scale can be a barrier to entry.

Your initial post should be 3-4 paragraphs in length. Make sure to demonstrate critical thinking and analysis by using research. For full credit, include one journal article to support your post.

Answer 1

Economies of scale occurs when increased output leads to lower average costs. This makes new firms having low output to find it difficult to compete in the market because their average costs will be higher than the incumbent firms benefiting from economies of scale. The prospect of higher average costs may deter entry into the market. A firm enjoying economies of scale have a higher market share and produce goods at a lower price. This presents a barrier to firms that want to enter the market since they need larger capital and operating cost to penetrate the market and also to make products. Moreover, a firm enjoying economies of scale have a competitive edge that they use to gain advantage over other firms. It is therefore, hard for a firm to enter the market if there exist the presence of a larger firm since they will do everything in their power to maintain their status quo.