Definitions and Types of Barriers to Entry
– Barrier to entry: a fixed cost that must be incurred by a new entrant into a market
– Various conflicting definitions of barrier to entry exist
– Primary barrier to entry: a cost that constitutes an economic barrier on its own
– Ancillary barrier to entry: a cost that reinforces other barriers to entry if they are present
– Antitrust barrier to entry: a cost that delays entry and reduces social welfare relative to immediate but equally costly entry
– Supply-side economies of scale: incumbents produce larger volumes of their product for a lower total cost
– Demand-side benefits of scale or network effects: buyers’ willingness to pay increases with the number of other buyers
Examples of Barriers to Entry
– Capital requirements: large amount of capital needed for initial investment and running of a company
– Incumbency advantages independent of size: cost and quality advantage for incumbents due to proprietary technology, brand identities, etc.
– Unequal access to distribution channels: limited wholesale and retail channels make entry more difficult
– Restrictive government policy: licensing requirements, restrictions on foreign investments, patenting laws, etc.
– Expectations about the reaction of existing competitors within the industry
Barriers to Entry and Market Power
– Barriers to entry contribute to distortionary prices
– They protect incumbent firms and restrict competition
– They can cause the existence of monopolies and oligopolies
– Barriers to entry are important in discussions of antitrust policy
– Brand loyalty is a natural barrier to entry in some industries
Barriers to Entry and Consumer Protection
– Governments can create barriers to entry to meet consumer protection laws
– Barriers can be due to inherent scarcity of public resources needed to enter a market
– Barriers to entry can help protect the public
– Barriers can be imposed to ensure safety and environmental regulations are met
– They can also be used to regulate industries such as alcohol and taxis
Government Regulations and Other Factors
– Licenses may be required to enter certain industries
– Government-owned firms dominate heavily regulated industries
– Regulations themselves may set barriers or raise investment requirements
– Some regulations, like AIR-21, make entry easier
– Incumbent firms can spend heavily on advertising to deter new competitors
– Investments in equipment and raw materials represent barriers to entry
– Sunk costs can increase the strength of barriers to entry
– Predatory pricing to make competition difficult
– Occupational licensing and quota limits on profession entry
– Incumbent firms’ advantages in advertising and branding
– Structural barriers to entry caused by industry conditions
– Exclusive dealing and strategic entry deterrence as anti-competitive practices
Note: The content has been organized into 5 comprehensive groups, combining identical concepts while keeping the facts, statistics, and detailed points intact. Source: https://en.wikipedia.org/wiki/Barriers_to_entry
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In theories of competition in economics, a barrier to entry, or an economic barrier to entry, is a fixed cost that must be incurred by a new entrant, regardless of production or sales activities, into a market that incumbents do not have or have not had to incur. Because barriers to entry protect incumbent firms and restrict competition in a market, they can contribute to distortionary prices and are therefore most important when discussing antitrust policy. Barriers to entry often cause or aid the existence of monopolies and oligopolies, or give companies market power. Barriers of entry also have an importance in industries. First of all it is important to identify that some exist naturally, such as brand loyalty. Governments can also create barriers to entry to meet consumer protection laws, protecting the public. In other cases it can also be due to inherent scarcity of public resources needed to enter a market.
