How can strategic entry barriers and predatory behaviour can be detrimental to consumers

Question

How can strategic entry barriers and predatory behaviour can be detrimental to consumers

Answer

Market entry barriers are the hurdles and obstacles faced by a company seeking to enter a market. When these are strategic it is implied that they have been deliberately put in place by an existing firm in the market, most likely a market leader, as a defensive measure. An example of this may be where a firm presently in the market invests strongly (more than is needed) in aggressive marketing. This would force a potential entrant to invest more heavily in marketing to try and gain attention, making entry more difficult and less attractive. Such techniques deter new entrants and thereby can reduce the level of competition in a market. This can be detrimental to consumers as lower competition can mean higher prices, lower quality or less innovation. This is because where there is less competitive pressure, there is less incentive for the companies to improve in order to remain competitive. In the most extreme form, a monopoly market has only one firm that is able to set the price for its goods, due to lack of competition. With fewer firms there is also a greater risk of collusion and cartels forming. For example in the UK energy market, where the few leading firms have repeatedly been criticised for fixing prices higher than the true competitive level (BBC, 2015; Chazan, 2014). Predatory behaviour refers to firms that take action to eliminate potential rivals before they can develop into a significant competitor. In some cases large firms will buy out rivals, in other cases methods are used that would be considered ‘unfair competition’ and may be illegal. An example is predatory pricing, also called undercutting, where a firm will sell at a very low rate, often loss-making, that their competitor cannot sustain. Predatory pricing is illegal in many countries because of the eventual harm it causes consumers by reducing competition.

References

BBC, 2015, Big six energy firms face price call from Energy Secretary Amber Rudd (online), available [http://www.bbc.co.uk/news/business-32972057], accessed: 10/10/2016 Chazan, G. 2014, Energy suppliers face prosecution over price fixing (online), Financial Times, available: [https://www.ft.com/content/ab44af16-1cbb-11e4-88c3-00144feabdc0}, accessed: 10/10/16