Barriers To Entry
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.
Barriers to Entry
Definition
Barriers to entry are economic and business terms that describe factors that can prevent or hinder new competitors from easily entering an industry or area of business. 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 profit.
Origin
The concept of barriers to entry can be traced back to early 20th-century economic studies. As market economies developed, scholars recognized that certain market characteristics could hinder new firms from entering, thus affecting market competition. In the mid-20th century, renowned economist Joe Bain systematically analyzed various forms and impacts of barriers to entry in his research, laying the theoretical foundation for this concept.
Categories and Characteristics
Barriers to entry can be categorized as follows:
- Structural Barriers: These include high startup costs, economies of scale, and technological advantages. These barriers typically arise from the inherent characteristics of the market.
- Legal and Regulatory Barriers: These include patent protection, licensing requirements, and government regulations. These barriers are determined by laws and policies.
- Strategic Barriers: These include brand recognition, customer loyalty, and high switching costs. These barriers are usually determined by the market strategies of existing firms.
Specific Cases
Case 1: Pharmaceutical Industry
The pharmaceutical industry is a typical high-barrier-to-entry industry. Developing and launching new drugs requires significant capital investment and time, along with stringent regulatory approvals. Patent protection makes it difficult for new entrants to replicate existing drugs, thus protecting the market share of existing companies.
Case 2: Airline Industry
The airline industry also has high barriers to entry. New airlines require substantial capital investment to purchase aircraft and establish infrastructure, along with obtaining flight permits and route allocations. These factors make it difficult for new entrants to compete with existing airlines.
Common Questions
Q: Why are barriers to entry important for market competition?
A: Barriers to entry limit the ability of new firms to enter the market, thereby reducing market competition. This allows existing firms to maintain higher market shares and profit margins.
Q: How can barriers to entry be lowered?
A: Governments can lower barriers to entry by relaxing regulatory requirements, providing financial support, and encouraging innovation to promote market competition.
