Barriers to Entry Definition
Barriers to entry are the economic hurdles that a new entrant in the market faces to enter that market, in other words, they are the fixed costs that new entrants have to pay irrespective of production or sales that would otherwise have not been incurred had the participant not been a new entrant.
Types of Barriers to Entry
Let us learn each one of the types of barriers to entry briefly:
- Capital Costs – There is some investment that is required by new entrants to run business in the market. They have to buy fixed assets to carry on production or to render service, etc.
- Competition – The new entrants have to face competition from the market stalwarts. Being in the market and enjoying market share, big wigs pose a severe threat to the start-ups.
- Legal Barriers – The government creates hindrances legally to the new entrants by granting a few exclusive rights, patents, etc. to a few companies.
- Marketing Barriers – As mentioned about the competition earlier, highly established companies would be able to spend huge amounts on advertisements while the new companies would not have the capacity to do so which makes it harder for them to establish their products in front of the customers.
- Limited Market – When there are too many players in the market, each of the companies shares a limited market only.
- Predatory Pricing – With predatory pricing prevailing in the market, it would be difficult.
- Finding Suppliers – When existing firms have dominant control over the markets, it may be almost impossible for the new entrants to find suppliers.
- Mastery of Technology – The existing players would have mastery over the technology prevailing in the market while the new entrants would usually be naïve.
- Learning Curve – With experience comes learning and with learning comes to speed and perfection. The existing players have this advantage over the new entrants.
- Economies of Scale – The main advantage of an established firm would be having is that they would have lower production per-unit costs because they have been able to achieve economies of scale.
Examples of Barriers to Entry
Below are some examples of entry barriers.
Entry Barriers Example #1
To start a bank is a big deal. It requires a lot of legal permissions and approvals from the government. Also a lot of compliances. This makes entry to the market difficult.
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Entry Barriers Example #2
Industries, where protection of human life is the main aspect like insurance and hospitals, barriers to entry exist because it is the government’s responsibility to check if there is proper oversight of the potential entrant, is to protect life and society’s well-being.
Entry Barriers Example #3
The vehicle industry usually has some strong and dominant players in the market who would have done extensive research about consumer preference, costs, road conditions, facilities, etc. They might have spent huge amounts on such research to come up with the products they have placed on the road and to reach this position which the new entrants would not be able to afford in a short period of time.
Advantages of Barriers to Entry
- Barriers to entry prevent new entrants from entering the market which produces cheap and inferior products at the market place.
- They protect the existing market players to protect their profits and revenue generation.
- Barriers to entry help current players concentrate on research and development rather than fighting over the competition with the new players.
- The government lays down regulations for players in a few industries such as transport to reduce the traffic, pollution, etc.; telecom industries to reduce heavy usage of infrastructure, land, etc.
- They aid the existence of monopoly and let the existing players enjoy the market power and market share.
- It gives the players a competitive edge.
- It is advantageous to consumers also because they get high-quality products at lower prices because of the competition.
Disadvantages of Barriers to Entry
- High costs of entry discourage the new entrants to the market thereby daunting the innovations.
- Monopoly prevails when new entrants are discouraged which might lead to dominance over the consumers.
- In a competitive market, the entry of new firms into the industry drop the profits and compete away the profits of the existing players unless the representative firm has just marginal profits.
- But this would not be the situation in the case of monopoly market because the monopolist may take advantage of the barriers to entry and these barriers prevent the entrants from threatening the profits of the player examples of which are discussed above.
- Likewise in any other kind of market i.e. other than monopoly where also existing firms enjoy a market share, an unlimited number of new entrants with new offers and innovations would cause a threat to the share and the share in profits if there are no barriers to entry.
- Not only with regards to the existing players, but the government also sets up some regulations and barriers so as to limit the number of firms in a few industries in the public interest.
- So we can conclude by saying that, although barriers to entry limit the innovation and discourage new firms, it instills a sense of responsibility among those willing to enter the market by making entry a little difficult for them.
This has been a guide to what are the Barriers to Entry and its Definition. Here we discuss the examples of barriers to entry along with types, advantages, and disadvantages. You can learn more about excel modeling from the following articles –