Barriers to Entry & Exit - A case study on Singapore Power

Topics: Barriers to entry, Strategic entry deterrence, Electricity market Pages: 6 (1994 words) Published: July 29, 2014
Barriers to Entry & Exist: A case study on Singapore Power. Singapore Power was first created to take over the electricity and gas business of the state provider, the Public Utilities Board in 1995 and was once considered as the only electricity company in Singapore. However, in 2001, Singapore Government took further steps in industry reform: separation of the natural monopolies (i.e. grid) from the competitive domain (i.e. generation and retail) in order to encourage competition and drive firms to be more cost-effective and avoid monopoly status that may hold negative effects for both the industry and consumers such as marketing complacency and loss of consumer solvency. Grid remained under Singapore Power, while each power plant was set up as a separate company to compete with one another. To name a few are: Senoko Power Ltd, Tuas Power Ltd, Keppel Merlimau Cogen Pte Ltd, Island Power Company Ltd… A. BARRIERS TO ENTRY:

What are barriers to entry?
“Barriers to Entry” are those factors that allow incumbent firms to earn positive economic profits while making it unprofitable for newcomers to enter the industry. There are two types of barriers to entry:

Structural barriers to entry
Strategic barriers to entry
1) Structural barriers to entry:
Structural barriers to entry have more to do with basic industry conditions such as cost and demand than with tactical actions taken by incumbent firms. Methods of structural barriers to entry used by Singapore Power: a. Control to essential resources

An incumbent is protected from entry if it controls a resource necessary for production and can use that resource more effectively than newcomers. In the case of Singapore Power, one of its subsidiaries, PowerGas has been Singapore’s sole licensed gas transporter and system operator since 1995, delivering both natural gas and town gas. This puts the whole Singapore Power at a prerogative position since Singapore Electricity Fuel Mix mostly relies on natural gas (natural gas makes up 77.8% of the Singapore electricity fuel mix). b. Sunk costs:

Sunk costs, from costs of specialized capital equipment to costs of government licenses, cannot be covered if a firm decides to leave the market. Sunk costs therefore increase the risk and deter entry. Singapore Power gained its competitive advantage in the market because electricity industry is such a capital-intensive industry with very high upstart sunk costs that incumbent has incurred but the entrant has not. If entry fails, then the entrant, unable to recover sunk costs will result in greater loss. In this way, sunk cost is a barrier to entry for other potential entrants in the industry. c. Government regulations/Statutory barrier to entry:

It makes entry more difficult because requirements for licenses and permits may raise the investment and level of technological know-how needed to enter a market, creating an effective barrier to entry. Singapore Power, being a leading energy utility company in the Asia Pacific, having all the advanced technology, investment and special know—how to ensure that Singapore electricity network is reliable and devoid of electrical outages, is therefore licensed by the government as the only grid owner in Singapore. In this case, we are saying that Singapore Power benefits greatly from favorable statutory barrier to entry. d. Learning curve (experience curve):

The learning curve refers to the advantages that flow from accumulating experience and know-how incumbents have over entrants by having stayed longer in the industry. Having been the major player in the electricity market for more than 10 years, Singapore Power distinguishes from entrants in their cutting-edge technology (Singapore Power has continuously commissioned and deployed new technology to enhance the performance and reliability of the whole electricity network such as the installation of the wireless Supervisory Control and Data Acquisition (SCADA) system for remote monitoring of...
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