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Main Barriers to Entry Case Study


Introduction

In recent years, various businesses have been “ripping-off” customers in Britain. Since 1999, the United Kingdom car industry embraced an anti-competitive pricing strategy after the admission of Volvo. Volvo is a leading European car manufacturer. The car dealers entered new agreements to keep car prices extremely high. Most of the car manufacturers in the country fixed prices through “selective and exclusive distribution” (Ruppert 22). This discussion examines the main barriers restricting entry to the car industry.

How the Main Barriers Restrict Entry into the Car Industry

The current situation in the country explains why it is hard for car dealers to enter into the United Kingdom’s car industry. The first barrier to entry to this industry is the existence of an “oligopolistic market structure” (Ruppert 14). The case study shows a classical example of an oligopoly whereby the market is dominated by a few car manufacturers and dealers.

The leading companies make secret agreements that keep car prices in the country extremely high. The companies also use “official” dealers to market their cars at a specified price (Ruppert 38). This explains why car prices in the country remains high. New firms trying to enter into the market cannot succeed because of the existing market structure. This explains how the car manufacturers have consistently blocked cheaper cars from the country.

The other barrier to this industry is the occurrence of “tacit collusion”. Tacit collusion is a strategy whereby two or more firms agree upon a specific approach without necessarily writing it on paper (Tucker 64). The strategy makes it impossible to have a strong response from other companies.

In the United Kingdom, the major car manufacturers have entered agreements to keep prices high. The strategy has kept potential competitors away (Ruppert 55). As well, the companies have constantly blocked cheaper cars from the country. The strategy discourages competitive practices thus forcing foreign companies to stay away. This kind of collusion promotes the business of the leading car dealers while threatening that of newcomers.

New companies targeting the industry encounter numerous threats from the existing players. This is a major barrier to entry because the car manufacturers use different anti-competitive practices. The approach makes the industry unattractive for foreign car dealers. For instance, the leading manufacturers have constantly threatened major European car dealers and manufacturers.

The new companies understand they can easily lose their businesses and dealership if they continue selling their cars to British consumers. Such threats have discouraged new players from investing in the industry (Ruppert 87). For new car manufacturers to enter to this industry, there should be no threats or any form of collusion. This explains why such a barrier makes the industry unattractive. As a result, the British consumer has to pay more for a car in the country.

In the United Kingdom, consumers have to purchase cars from the leading car manufacturers. The companies use “price signalling” to lock out foreign car dealers (Stackelberg 19). The dealers also delay delivery of ordered cars to the country. This has made it impossible for new companies to enter the industry. British buyers are forced to change their minds and buy cars from British dealers. This explains why car prices in the United Kingdom are higher than in other European countries.

Although the European Commission (EC) advocates for a healthy competition, the major companies in Britain do not embrace a “Cournot Competition”.

This occurs when the existing companies do not act strategically. Instead, they collude in order to dominate the industry. This continues to affect the industry by discouraging new entries. The consumer continues to suffer from the situation by paying more than 10 % for a car. Without a healthy competition, new companies will find the industry less attractive and instead consider investing in other countries (Stackelberg 23).

In 2002, the European Commission (EC) decided to change the “Block Exemption” regulations in order to allow different competitors operate in different countries. The new regulation provided car distributors exclusive territories to market or distribute their cars. The strategy helped develop new sales outlets in the European Union.

However, the existence of the above barriers has not altered the situation in the United Kingdom (Tucker 81). Most of the car models marketed in the country are usually expensive than the normal European Union price. The rate of inflation continues to keep car prices high. Whenever there are barriers to entry, new dealers and car manufacturers are unable to have a profitable business.

Conclusion

There have been numerous accusations that British consumers are forced to pay much higher prices for cars than their Europeans counterparts. From the above discussion, it is notable that the Nash equilibrium is not embraced in the country. Instead, the car manufacturers have colluded with dealers in order to threaten new marketers. The existence of an oligopolistic market structure also makes the industry less attractive. The above barriers to entry to this industry have continued to affect the British car buyer.

Works Cited

Ruppert, James. The British Car Industry: Our Part in Its Downfall. London: Foresight Publications, 2008. Print.

Stackelberg, Heinrich. Market Structure and Equilibrium. Oxford: Oxford University Press, 2012. Print.

Tucker, Irvin. Macroeconomics for Today. Oxford: Oxford University Press, 2010. Print.

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IvyPanda. 2019. "Main Barriers to Entry." June 16, 2019. https://ivypanda.com/essays/main-barriers-to-entry/.

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IvyPanda. (2019) 'Main Barriers to Entry'. 16 June.

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