Managerial Economics: Barriers to Entry and Consumer Exploitation

This report delves into the realm of managerial economics, examining the nature of barriers to entry within a market, the potential for consumer exploitation, and the likelihood of future rate adjustments. It explores how factors such as economies of scale, brand loyalty, limit pricing, predatory pricing, and knowledge/expertise can create barriers, making markets less competitive. The report uses the case of mobile phone operators colluding to raise roaming rates to illustrate how consumers can be exploited due to market structures and pricing leadership. It further discusses the concept of collusion, predatory pricing and price discrimination. The analysis suggests that if the commission does not take action, there are chances of price decrease in the future.

Managerial Economics

Table of Contents
INTRODUCTION...........................................................................................................................1
1: The nature of barrier to entry in the market.................................................................................1
2: To exploit consumer in this case. ...........................................................................................2
3. Fall in rates in the near future.................................................................................................3
References........................................................................................................................................5

INTRODUCTION
The goal of the managerial economic is to apply the economic fundamental and
economics analysis on the problem which may take place in the rational management decision
making. The managerial economic is considered as a sub discipline of social science which is
proved to be useful for manager of the firm in taking important decision on different barriers.
1: The nature of barrier to entry in the market.
Barrier to entry are those factors which prevent or make it difficult for the company to enter into
a new market. Due to the existence of barrier to entry in new market make the market less
contestable and competitive (Zhou, Li and Shao, 2014). In the monopoly market barrier to entry
are some an important factor which are as follows:
Economies of scale: Economies of scale take place at the tome when output is enhanced then
average cost get lower. Due to this reason, new company who want to enter into a new market
with the low output unable to survive in front of existing firm because their average cost is
higher than the incumbent firm benefiting firms from economies of scale.
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The above graph shows that the firm which is producing at Q1 has lower average cost. While the
new company which enter into a market and produces Q2 its average cost lead to make it
uncompetitive.
Brand loyalty with advertising: If company increase customer loyalty by developing a strong
brand image lead to reject entry (Heirati and O’Cass, 2016.). If existing company have strong
brand image then other firm who want to enter into a new market needs to spend lots of money
and time on promoting the products and services which lead to increase cost and deterrent the
entry. However, there are some firms who do not need to advertise as because of their strong
position. For instance, the strong brand loyalty of google search engine means that it is tough for
other search engine to displace Google. If other search engine are technically good then also they
cannot take place of Google because of its strong position.
Limit pricing: Limit pricing take place at the time when the company sets price enough
low to prevent from entry (Guţă, 2017). A monopoly market is engaged in limit pricing This
means to have fewer profit. They try to keep low price of the product and services so that
competition can be avoided. It is same as economies of scale.
Predatory pricing: It takes place at the time when existing firm responds to the new firm
which enter into a market. This is done through pricing war and try to push rival firm out of the
market. It is not easy because it is illegal therefore company face difficult in carrying out these
practices.
Knowledge and expertise: The existing company is carrying out its business from longer
time in a market due to which it gains lots of knowledge related to the consumer taste and
preference and technical. It leads to make difficult for the new firm to enter in a market with less
knowledge and survive in market (Dutta and Roy, 2014). For example Google is well established
and technological giants as from longer time then are operating their business in the market
which give them huge knowledge, as it make hard for new firm to catch up.
2: To exploit consumer in this case.
As per the given scenario, Mario Monti, is the European Union’s competition
commissioner, that mobile phone operators have gouged customers by colluding to raise rates for
roaming. In the month of December MrIn December Mr Monti’s office issued a report on the
market for roaming. It is easy to exploit consumer in this case because of few reasons
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The problem which is the issues of market structure is related to the determination of price and
output which give different market condition consider in this. Further, price leadership is known
as the commonly behaviour pattern in oligopolistic industries is the situation in which one
company set price and adopt the price changes by following the other firms with a short time in
just a few days (Maurice and Thomas, 2015). There are different ways for occurring such type of
behaviour as it depend on the two factor that are as follows:
Product differentiations: for the consistent product the company who follow other basically set
the price as similar to its leader. Further in more common cases such as different in products the
price followers generally conform a fixed structure of recognised different in price as compare to
leader.
Types of leadership: In types of leadership there are 2 different types of possibilities
such as barometric price leadership and dominant price leadership (Dutta and Roy, 2014). At the
time when prices and output are determined under the pricing leadership situation as there is no
expressly agreement in between firms.
Collusion is the term that is used mostly and refer to the co-operative behaviour between
firms in the oligopoly market. The explicit collusion work to include more than one firm in order
to form cartel. It can be stated as agreement among the firms for determining prices, market
share and informal nature of the firm (Bellin, 2017). In the developing country this type of
agreement are basically illegal. However, they are continued on the basis of informal. The reason
behind this is that it is not easy for government to provider their existence.
In the given case, it is easy to exploit consumers as because pricing in the wholesale market is
transparent which make easy for the market leader to increase while other operator follow the
leader and do the same (Novikova, Novikov and Shlyakhta, 2016.). The market concentration is
consider as a point to lack of considerations. In the EEA nations, there is single operator who
have appropriately 50% of market share, it becomes a barrier for the competitive market for
roaming may be the ease with which the operators can exploit the consumer in the market.
3. Fall in rates in the near future
The issues faced is because of the monopoly market. In the UK it is the situation in which
a cartel make control on 25% of market. The European commission uses a vaguer definition The
collusion in terms of prices there are regulators who are concerned with predatory pricing. In
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general term predatory pricing is the practice of charging lower price as compare to average cost
in order to gain competitive advantage. After gaining competitive advantage company increase
the price so that it can easily gain monopoly profit. It is illegal but in UK and EU but not easy to
detect. Price discrimination is considered in the predatory pricing. Therefore, if commission does
not take any action then in future there are chances of decrease in price.
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