Barriers To Entry
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Barriers to entry is an economics and business term describing factors that can prevent or impede newcomers into a market or industry sector, and so limit competition. These can include high start-up costs, regulatory hurdles, or other obstacles that prevent new competitors from easily entering a business sector. Barriers to entry benefit existing firms because they protect their market share and ability to generate revenues and profits.Common barriers to entry include special tax benefits to existing firms, patent protections, strong brand identity, customer loyalty, and high customer switching costs. Other barriers include the need for new companies to obtain licenses or regulatory clearance before operation.
Definition
Barriers to entry are economic and business terms that describe factors which can prevent or hinder new competitors from easily entering an industry or area of business, thus limiting competition. These factors may include high startup costs, regulatory hurdles, or other obstacles that make it difficult for new competitors to enter the market. Barriers to entry benefit existing companies as they protect their market share and ability to generate revenue and profits.
Origin
The concept of barriers to entry originated in economics, first introduced by economist Joe Bain in 1956. He systematically analyzed the factors that impede new firms from entering a market while studying market structure and competition. With globalization and increased market competition, the study and application of barriers to entry have become more widespread.
Categories and Features
Barriers to entry can be categorized into structural, strategic, and legal barriers. Structural barriers often involve high initial investments and technical requirements. Strategic barriers are obstacles set by existing firms through pricing strategies, brand loyalty, etc. Legal barriers include government regulations, patents, and licensing requirements. Each type of barrier has specific application scenarios and pros and cons.
Case Studies
A typical example is the pharmaceutical industry, where patent protection serves as a significant barrier to entry. Pfizer, for instance, uses patents to protect its drugs, preventing other companies from producing the same drugs during the patent period, thus maintaining market advantage. Another example is the telecommunications industry, where operators need government-issued licenses to operate, posing significant legal barriers to new entrants.
Common Issues
Investors often misunderstand the role of barriers to entry, assuming they always benefit the market. In reality, excessively high barriers can lead to market monopolies, reducing innovation and consumer choice. Additionally, with technological advancements, some traditional barriers may be weakened, such as the internet reducing entry costs in many industries.
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