Economics Essay 37: Barriers to Entry

Distinguish, using examples, between structural and behavioural barriers to entry. 

Structural and behavioral barriers to entry are two types of obstacles that can prevent or limit the entry of new competitors into a market. Let's look at each type and provide examples to distinguish between them:

1. Structural Barriers to Entry: Structural barriers are inherent characteristics of an industry or market that make it difficult for new firms to enter and compete effectively. These barriers are typically related to the industry's structure, resources, or economies of scale. Here are some examples:

a) Economies of Scale: Established companies may enjoy cost advantages due to their large-scale operations, making it difficult for new entrants to match their prices. For instance, in the automobile industry, well-established manufacturers benefit from economies of scale, enabling them to produce vehicles at lower costs compared to new entrants.

b) Capital Requirements: Some industries require substantial upfront investments in infrastructure, equipment, or research and development. This can create a significant barrier for new firms with limited financial resources. An example is the airline industry, where substantial capital is needed to purchase aircraft and establish routes.

c) Intellectual Property Rights: Industries with strong intellectual property protections, such as pharmaceuticals or software, can create barriers to entry. New firms may face challenges in developing innovative products or services due to existing patents or copyrights held by incumbents.

2. Behavioral Barriers to Entry: Behavioral barriers are created by the actions and strategies of incumbent firms to deter or impede new entrants. These barriers are not inherent to the industry's structure but are rather the result of deliberate actions by existing players. Here are some examples:

a) Predatory Pricing: Incumbent firms may engage in predatory pricing, where they temporarily lower prices to drive new entrants out of the market. Once the new entrants exit or are weakened, the incumbents raise prices again. This strategy makes it difficult for new firms to establish a foothold in the market.

b) Exclusive Contracts: Existing companies may establish exclusive contracts with suppliers, distributors, or retailers, limiting the access of new entrants to crucial resources or distribution channels. This practice can hinder the ability of new firms to compete effectively. An example is exclusive distribution agreements in the beverage industry.

c) Brand Loyalty and Switching Costs: Incumbent firms with strong brand recognition and customer loyalty can make it challenging for new entrants to attract customers. Additionally, industries where customers face significant switching costs, such as changing software providers or mobile phone carriers, create barriers for new firms trying to enter the market.

It's important to note that these barriers can often interact and reinforce each other, making entry into certain markets even more challenging for new competitors. Understanding these barriers is crucial for policymakers and businesses to ensure fair competition and promote market entry. 

The European Super League is the perfect metaphor for global capitalism

From elite football to tech giants, our lives are increasingly governed by ‘free’ markets that turn out to be rigged writes Larry Elliott in The Guardian

‘The organisers of the ESL have taken textbook free-market capitalism and turned it on its head.’ Graffiti showing the Juventus president, Andrea Agnelli, near the headquarters of the Italian Football Federation in Rome. Photograph: Filippo Monteforte/AFP/Getty Images


Back in the days of the Soviet Union, it was common to hear people on the left criticise the Kremlin for pursuing the wrong kind of socialism. There was nothing wrong with the theory, they said, rather the warped form of it conducted behind the iron curtain. 

The same argument has surfaced this week amid the furious response to the now-aborted plans to form a European Super League for 20 football clubs, only this time from the right. Free-market purists say they hate the idea because it is the wrong form of capitalism.

They are both right and wrong about that. Free-market capitalism is supposed to work through competition, which means no barriers to entry for new, innovative products. In football’s case, that would be a go-ahead small club with a manager trying radical new training methods and fielding a crop of players it had nurtured itself or invested in through the transfer market. The league-winning Derby County and Nottingham Forest teams developed by Brian Clough in the 1970s would be an example of this.

Supporters of free-market capitalism say that the system can tolerate inequality provided there is the opportunity to better yourself. They are opposed to cartels and firms that use their market power to protect themselves from smaller and nimbler rivals. Nor do they like rentier capitalism, which is where people can make large returns from assets they happen to own but without doing anything themselves.

The organisers of the ESL have taken textbook free-market capitalism and turned it on its head. Having 15 of the 20 places guaranteed for the founder members represents a colossal barrier to entry and clearly stifles competition. There is not much chance of “creative destruction” if an elite group of clubs can entrench their position by trousering the bulk of the TV receipts that their matches will generate. Owners of the clubs are classic rentier capitalists.

Where the free-market critics of the ESL are wrong is in thinking the ESL is some sort of aberration, a one-off deviation from established practice, rather than a metaphor for what global capitalism has become: an edifice built on piles of debt where the owners of businesses say they love competition but do everything they can to avoid it. Just as the top European clubs have feeder teams that they can exploit for new talent, so the US tech giants have been busy buying up anything that looks like providing competition. It is why Google has bought a slew of rival online advertising vendors and why Facebook bought Instagram and WhatsApp.

For those who want to understand how the economics of football have changed, a good starting point is The Glory Game, a book Hunter Davies wrote about his life behind the scenes with Tottenham Hotspur, one of the wannabe members of the ESL, in the 1971-72 season. (Full disclosure: I am a Spurs season ticket holder.)

Davies’s book devotes a chapter to the directors of Spurs in the early 1970s, who were all lifelong supporters of the club and who received no payment for their services. They lived in Enfield, not in the Bahamas, which is where the current owner, Joe Lewis, resides as a tax exile. These were not radical men. They could not conceive of there ever being women on the board; they opposed advertising inside the ground and were only just coming round to the idea of a club shop to sell official Spurs merchandise. They were conservative in all senses of the word.

In the intervening half century, the men who made their money out of nuts and bolts and waste paper firms in north London have been replaced by oligarchs and hedge funds. TV, barely mentioned in the Glory Game, has arrived with its billions of pounds in revenue. Facilities have improved and the players are fitter, stronger and much better paid than those of the early 1970s. In very few sectors of modern Britain can it be said that the workers receive the full fruits of their labours: the Premier League is one of them.

Even so, the model is not really working and would have worked even less well had the ESL come about. And it goes a lot deeper than greed, something that can hardly be said to be new to football.

No question, greed is part of the story, because for some clubs the prospect of sharing an initial €3.5bn (£3bn) pot of money was just too tempting given their debts, but there was also a problem with the product on offer.

Some of the competitive verve has already been sucked out of football thanks to the concentration of wealth. In the 1970s, there was far more chance of a less prosperous club having their moment of glory: not only did Derby and Forest win the league, but Sunderland, Southampton and Ipswich won the FA Cup. Fans can accept the despair of defeat if they can occasionally hope for the thrill of victory, but the ESL was essentially a way for an elite to insulate itself against the risk of failure.

By presenting their half-baked idea in the way they did, the ESL clubs committed one of capitalism’s cardinal sins: they damaged their own brand. Companies – especially those that rely on loyalty to their product – do that at their peril, not least because it forces politicians to respond. Supporters have power and so do governments, if they choose to exercise it.

The ESL has demonstrated that global capitalism operates on the basis of rigged markets not free markets, and those running the show are only interested in entrenching existing inequalities. It was a truly bad idea, but by providing a lesson in economics to millions of fans it may have performed a public service.

Why landlords should pass a fitting person test and criminal record checks

Penny Anderson in The Guardian


Being a landlord is a privilege, and it shouldn’t be available to everybody: with the power they have over their tenants should come a sense of responsibility

 

‘Owners misunderstand, ignore or forget legal requirement to issue proper notices to quit, or the need for prior warning of inspection visits.’ Photograph: Alamy


There are more private landlords than ever. Many are reasonable. Some are even excellent, but letting property is largely unrestricted.

Sadiq Khan, the mayor of London, has highlighted the failure of his predecessor Boris Johnson to sign up 100,000 landlords to his much vaunted London Rental Standard, which aims to help landlords with things such as having a gas safety check every year, and the laws around deposits and fire safety. After two years in operation, the scheme had attracted fewer than 2,000 landlords in addition to the 13,300 it inherited.

The files reveal that officials warned the mayor at the outset that his target was unattainable and that it would take “more than 50 years to accredit a sufficient number of landlords to meet the target”. Another note read: “We simply don’t have the resources to proactively enforce the London Rental Standard, which leaves us with an unacceptable reputational risk.” Johnson’s betrayal of renters in the capital after all the promises made is embarrassing for him, but a disaster for tenants. There is no doubt that the job needs doing.

Dilettante amateur property investors often know little about basic good practice, the law or simply what’s best for everyone when it comes to running their business in a civilised, humane fashion – and yes, it is a business, with the potential for profit and loss. They might be reluctant or “forced” rentiers (a term I prefer to landlord), with the family home in negative equity, compelled to rent it out if they want to move on. Outside London this is still a reality, and with the predicted house-price crash on Brexit, that practice may become more widespread.

This situation fuels the likelihood that tenants will be turfed out as soon as possible when the building increases in value. Remember that all tenants live under the threat of just two months’ notice when their initial assured shorthold tenancy rolls over. There is no security for renters.

There are recurring issues, such as owners who do not understand the concept of reasonable wear and tear expecting their properties to remain pristine and unmarked, even when the low-quality carpets and sofas they chose were threadbare to begin with. This in turn propagates the now traditional unlawful deposit retention/deduction battle, which can see mundane events – the simple act of using the sofa perhaps – cited as justification for the retention of hundreds of pounds, obliging tenants to fight for, and rarely succeed in getting, the return of hard-earned money paid up-front.

‘There are recurring issues, such as owners not understanding the concept of reasonable wear and tear, even when the low-quality carpets and sofas they chose were threadbare to begin with.’ Photograph: Popperfoto/Getty Images

There are the problems of legal management. Owners misunderstand, ignore or forget the legal requirement to issue proper notices to quit, or the need for prior warning of inspection visits, using the power of thought or suggestion instead. Some owners I have rented from imagine they can let themselves in whenever they see fit.

Let’s be reasonable. We know that property doesn’t manage itself, and can be costly to maintain. The obligation to repair causes tension once owners, even the best-intentioned ones, grow acquainted with the expense of emergency out-of-hours plumbing.

Some owners – through indolence or meanness – would rather let the place rot; a friend’s landlord knowingly allows water from the leaky tiles to be absorbed by cavity wall insulation. Ultimately, his roof will cave in, but he doesn’t seem to care – either about the tenant or the ultimate expense. Other owners issue “revenge” notices – where tenants are forced out for insisting on damage being made good. Tenants who stand up for their rights are frequently viewed as troublemakers.

Tenants are not angelic. Some give as good as they get in the owner-tenant relationship. But the balance of power between the two is clearly in the landlord’s favour. Isn’t it time for power with more responsibility?

A requirement for landlord training would allow neophyte property moguls to escape being bogged down in pointless, petty battles with tenants. They also would learn about both the availability (and wisdom) of landlord insurance and the pros and cons of letting agents, who charge up to 15% of income and often do very little to earn it.

Being a landlord is a profitable privilege, but it isn’t one that should be automatically available to everybody. It should be earned by those who prove themselves knowledgeable and capable, having passed both a “fitting person” test and a criminal records check. Don’t forget: landlords possess keys to their tenants’ homes, and need to understand obligations. Owners would also benefit from better safeguards and more clarity because both would improve their relationships with tenants, and contented tenants stay longer in their properties.

The rentier economy marches on and will continue to do so, because set against the decline in pensions and increasing job insecurity, property is regarded as a solid guarantee against poverty. The fact that people make money from renting isn’t a problem. Nor is the fact that these transactions occur in the private sector. What’s missing and badly needed is the idea of responsibility.

Oxbridge walls that can't be scaled

 

Johann Hari

A blunt, blind admissions system still discriminates in favour of wealthy interview-machines

Thursday, 4 September 2008

Nothing causes a louder shriek in Britain than if you challenge the right of the rich to pass their privilege untouched on to their children. The shadow chancellor George Osborne has just decreed that the richest 1 per cent will – under David Cameron – be allowed to inherit £2 million estates they have done nothing to earn without paying a penny of it towards schools and hospitals. The "horror" of inheritance tax – introduced in the great progressive wave of the Edwardian era – will be over. This has been greeted with a gurgle of pleasure by Conservatives; why should anyone get in the way of wealth "cascading down the generations", as a Tory Prime Minister once put it?

Over the next few months, an even more tender spot for the privileged will be pressed: Oxford and Cambridge admissions. Today, a third of all Oxbridge students come from just 100 top schools. For example, half of the entire intake of £20,000-a-year Westminster School go there every year: some 410 pupils. The wealthy now have a taken-for-granted expectation that their kids will go to the best universities.

Some on the right, like the late Bill Deedes, explained this by saying the wealthy are a genetic over-class who naturally have cleverer children. But there's a hole in the side of this theory: several studies have shown that when rich people adopt kids from poor backgrounds, those children go on to do just as well.

To see how this buying of unearned privilege works, I have to introduce you to two people I know who applied to study Philosophy at the same Cambridge college as me in 1998. The first is a likeable, confident guy whose parents are wealthy businesspeople. Let's call him Andrew. They sent him to one of the most expensive private schools in Britain, and he had never been in a class larger than 12. He was trained for over a year for his Cambridge interview – a near-scientific drill that included one-on-one tuition by Oxbridge graduates, extensive rewriting of his application form "with" a teacher, and even being videoed so his body language could be analysed.

The other person, by contrast, was a chain-smoking teenager brought up on an Enfield estate by her dinner-lady mum. Laura wrote her application alone, and she had no preparation for her interview at all. None. Most of her A-level classes had 25 people in them, and were led by teachers who hadn't even got top grades themselves. Andrew got four As. Laura got an A and three Bs.

Who had demonstrated they were smarter? I'd say Laura did – but she was rejected, while Andrew got in. His training – and a lifetime in such surroundings – paid off. Laura was nervous, and her complex thoughts about Nietzsche and Hume and Russell must have appeared less polished. It was Cambridge's loss: the cleverer student got away. This isn't a stray anecdote. For too long, it was the main story. In 2006, for example, the gap between the best private schools and the best grammar schools in exam results was just 1 per cent – but the private schools students were still twice as likely to be admitted.

Here's where we get to the pressure-point. For the past few years, senior figures in Oxford and Cambridge – pressured by a Labour government – have resolved this can't go on. They want to run a university for the best, not a highbrow finishing school. So they have begun to introduce very mild reformist measures. Instead of just looking at the surface of exam and interview performance, they will judge them in the context of the student's life. They'll look at your school's average exam grades, whether your parents went to university, and the area you're from: if you got good grades at a school in Moss Side, you'll be rated higher. This is painted by huffing headmasters at private schools as "positive discrimination". But the choice is not between a system that discriminates and one that doesn't. It's between a blunt, blind admissions system that discriminates in favour of wealthy well-trained interview-machines, and a sophisticated, seeing one that snuffles out the genuinely clever.
Soon the green shoots of these new policies will become clear. Geoff Parks, Cambridge's Director of Admissions, says early indicators show there will be a "significant" increase in pupils from normal backgrounds this year. Expect a firestorm of anger. The right-wing press will rage that "middle-class" children are being "persecuted". Their definition of "middle-class" is increasingly comic: the median wage in Britain is £24,000. Half of us earn more; half of us earn less. Yet they describe as "Middle England" people who spend that entire sum every year on one child's schooling.

Often, the privileged will defend their place merely with a visceral howl of "It's mine!" For example, David Cameron's relative Harry Mount has written an angry article asking, "What's wrong with keeping Oxford within the family?" He admits his success at his interview was "staggeringly unfair" but went on to say the only problem is rich people can't buy preference for their children outright with "donations."

There will be furious predictions that Oxbridge will collapse under a "chav-alanche" of inferior students. Those of us who believe that in Britain you should be able to get to the top if you are smart need to push back hard for these changes to be stepped up. Of course Oxbridge can't get us all the way to genuine meritocracy. For that, the schools system needs to be reworked to be genuinely comprehensive, rather than the parody we have today where they are split between good schools selecting by house-price and sink schools for the rest. But even with the unequal products of that system, Oxbridge can go a lot further.

In the 1970s, when the former Conservative Prime Minister Harold Macmillan was Chancellor of Oxford University, he was amazed by the changes in the admissions process. "In my day," he said, "all they asked you was where you got your boots made." In the 2040s, we will be equally astonished that Oxbridge used to rely so heavily on interviews that give an unfair advantage to the well-drilled children of the wealthy.

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