barriers to entry

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Barrier to Entry

A high cost or other difficulty that prevents or makes it difficult for new businesses to enter an industry. For instance, high regulation or customer loyalty may be barriers to entry for a new company. Barriers to entry provide a distinct advantage for companies already operating; these companies have high profit margins and few competitors. Examples of industries with barriers to entry are the telecommunications and energy industries, because of the high cost of infrastructure necessary to begin operations. See also: Barriers to exit.

barriers to entry

obstacles in the way of firms attempting to enter a MARKET, which operate to give established firms particular advantages over newcomers. There are a number of potential barriers to entry, including:
  1. ECONOMIES OF SCALE – where unit costs of production (marketing, distribution and research and development) decline with the volume produced, the minimum efficient scale of operation may require entry on a large scale; otherwise entrants would be put at a relative cost disadvantage;
  2. PRODUCT DIFFERENTIATION – entrants with ‘unknown’ and ‘untried’ products may be unable to win a viable share of the market because of customer loyalty to existing brands built up by established firms through cumulative investment in advertising and sales promotion;
  3. capital requirements – the cost of financing investment in plant and product differentiation, and meeting initial operating losses, may be prohibitively high;
  4. vertical restrictions – key raw materials, component sources and distribution channels – may be controlled by established firms, thereby limiting access to inputs and market outlets. See VERTICAL INTEGRATION;
  5. absolute cost disadvantages – entrants, for example, may be denied access to ‘best state-of-the-art technology’ because of PATENT rights accruing to established firms, and thus be forced to adopt inferior, higher cost methods of production, etc.

One, or some combination, of the above factors may pose particular problems for a small scale, GREENFIELD type of entrant. However, they may be of little consequence to a large conglomerate firm possessing ample financial resources, and which chooses to effect entry by MERGER with, or TAKEOVER of, an established producer. Moreover, the basic assumption of much entry theory that established firms invariably possess advantages over potential entrants must also be challenged. In a dynamic market situation entrants may be in a position to introduce new technology ahead of existing firms, or develop innovative new products, thereby giving them COMPETITIVE ADVANTAGES over established firms. See MARKET ENTRY, MARKET STRUCTURE, DIVERSIFICATION, BRAND PROLIFERATION, MARKET SYSTEM, MOBILITY BARRIER.

barriers to entry

an element of MARKET STRUCTURE that refers to obstacles in the way of potential newcomers to a MARKET. These obstacles operate in a number of ways to discourage entry:
  1. lower cost advantages to established firms, arising from the possession of substantial market shares and the realization of ECONOMIES OF LARGE SCALE production and distribution;
  2. strong consumer preferences for the products of established firms, resulting from PRODUCT DIFFERENTIATION activities;
  3. the control of essential raw materials, technology and market outlets by established firms, either through direct ownership or through PATENTS, FRANCHISES and EXCLUSIVE DEALING CONTRACTS;
  4. large capital outlays required by entrants to set up production and to cover losses during the initial entry phase.

The economic significance of barriers to entry lies in their capacity for blocking MARKET ENTRY, thereby allowing established firms to earn ABOVE NORMAL PROFIT and affecting the RESOURCE ALLOCATION function of markets.

One, or some combination, of the above factors may pose particular problems for a small-scale, GREENFIELD type of entrant. However, they may be of little consequence to a large conglomerate firm possessing ample financial resources that chooses to effect entry by MERGER with, or TAKEOVER of, an established producer. Moreover, the basic assumption of much entry theory - that established firms invariably possess advantages over potential entrants - must also be challenged. In a dynamic market situation, entrants may be in a position to introduce new technology ahead of existing firms or to develop innovative new products, thereby giving them COMPETITIVE ADVANTAGES over established firms.

For example, the introduction of FLEXIBLE MANUFACTURING SYSTEMS has enabled small entrant firms to secure similar cost advantages to their larger established rivals’ exploitation of economies of scale, while giving them greater adaptability to rapid changes in customers demands. Changes in distribution channels likewise have provided firms with entry opportunities. For example, E-COMMERCE on the INTERNET has enabled small firms to tap into markets at low cost and to sell their products at lower prices directly to customers than rivals using traditional wholesaler-retailer networks (see DIRECT SELLING/MARKETING). See also CONDITION OF ENTRY, LIMIT PRICING, POTENTIAL ENTRANT, OLIGOPOLY, MONOPOLY, MOBILITY BARRIERS.