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In theories of
competition Competition is a rivalry A rivalry is the state of two people or groups engaging in a lasting competitive relationship. Rivalry is the "against each other" spirit between two competing sides. The relationship itself may also be called "a ri ...
in
economics Economics () is a social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and interact ...

economics
, a barrier to entry, or an economic barrier to entry, is a
fixed cost In accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to compa ...

fixed cost
that must be incurred by a new entrant, regardless of production or sales activities, into a
market Market may refer to: *Market (economics) *Market economy *Marketplace, a physical marketplace or public market Geography *Märket, an island shared by Finland and Sweden Art, entertainment, and media Films *Market (1965 film), ''Market'' (1965 ...
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 Competition law is a law Law is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, surrounded and influenced by its environmen ...
policy. Barriers to entry often cause or aid the existence of
monopolies A monopoly (from Greek language, Greek el, μόνος, mónos, single, alone, label=none and el, πωλεῖν, pōleîn, to sell, label=none) is as described by Irving Fisher, a market with the "absence of competition", creating a situation whe ...
and oligopolies, or give companies
market power In economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the science of plant ...
.


Definitions

Various conflicting definitions of "barrier to entry" have been put forth since the 1950s, and there has been no clear consensus on which definition should be used. This has caused considerable confusion and likely flawed policy. McAfee, Mialon, and Williams list 7 common definitions in economic literature in chronological order including: In 1956, Joe S. Bain used the definition "an advantage of established sellers in an industry over potential entrant sellers, which is reflected in the extent to which established sellers can persistently raise their prices above competitive levels without attracting new firms to enter the industry." McAfee et al. criticized this as being tautological by putting the "consequences of the definition into the definition itself." In 1968,
George Stigler George Joseph Stigler (; January 17, 1911 – December 1, 1991) was an American economist An economist is a professional and practitioner in the social science Social science is the branch The branches and leaves of a tree. A br ...
defined an entry barrier as "A cost of producing that must be borne by a firm which seeks to enter an industry but is not borne by firms already in the industry." McAfee et al. criticized the phrase "is not borne" as being confusing and incomplete by implying that only current costs need be considered. In 1979, Franklin M. Fisher gave the definition "anything that prevents entry when entry is socially beneficial." McAfee et al. criticized this along the same lines as Bain's definition. In 1994, Dennis Carlton and Jeffrey Perloff gave the definition, "anything that prevents an entrepreneur from instantaneously creating a new firm in a market." Carlton and Perloff then dismiss their own definition as impractical and instead use their own definition of a "long-term barrier to entry" which is defined very closely to the definition in the introduction. A primary barrier to entry is a cost that constitutes an economic barrier to entry on its own. An ancillary barrier to entry is a cost that does not constitute a barrier to entry by itself, but reinforces other barriers to entry if they are present. An antitrust barrier to entry is "a cost that delays entry and thereby reduces social welfare relative to immediate but equally costly entry". This contrasts with the concept of ''economic barrier to entry'' defined above, as it can delay entry into a market but does not result in any cost-advantage to incumbents in the market. All economic barriers to entry are antitrust barriers to entry, but the converse is not true.


Examples

The following examples fit all the common definitions of primary economic barriers to entry. * Distributor agreements – Exclusive agreements with key distributors or
retailer Retail is the sale of goods In economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or p ...
s can make it difficult for other manufacturers to enter the industry. In the earlier stage, the firms which enter the market would use intensive distribution strategies in order to restrict the potential entrants to access to distributors. *
Intellectual property Intellectual property (IP) is a category of property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of the property, an owner o ...
– Potential entrant requires access to equally efficient production technology as the combatant monopolist in order to freely enter a market.
Patent A patent is a type of intellectual property Intellectual property (IP) is a category of property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depe ...

Patent
s give a firm the legal right to stop other firms producing a product for a given period of time, and so restrict entry into a market. Patents are intended to encourage
invention An invention is a unique or novelty (patent), novel machine, device, method, composition or process. The invention process is a process within an overall engineering and product development process. It may be an improvement upon a machine or p ...

invention
and
technological Technology ("science of craft", from Ancient Greek, Greek , ''techne'', "art, skill, cunning of hand"; and , ''wikt:-logia, -logia'') is the sum of Art techniques and materials, techniques, skills, Scientific method, methods, and Business proc ...

technological
progress by guaranteeing proceeds as an incentive. Similarly,
trademark A trademark (also written trade mark or trade-mark) is a type of intellectual property Intellectual property (IP) is a category of property Property is a system of rights that gives people legal control of valuable things, and also r ...

trademark
s and
servicemark A service mark or servicemark is a trademark A trademark (also written trade mark or trade-mark) is a type of intellectual property Intellectual property (IP) is a category of property that includes intangible creations of the human ...
s may represent a kind of entry barrier for a particular product or service if the market is dominated by one or a few well-known names. The implementation including incumbent firms have exclusive right to use the brand name and can be costly for entrants to use those brand names. * Restrictive practices, such as air transport agreements that make it difficult for new airlines to obtain
landing slot__NOTOC__ A landing slot, takeoff slot, or airport slot is a permission granted by the owner of an airport An airport is an aerodrome with extended facilities, mostly for commercial air transport. Airports often have facilities to park and ...
s at some
airport An airport is an aerodrome An aerodrome (Commonwealth English The use of the English language English is a West Germanic languages, West Germanic language first spoken in History of Anglo-Saxon England, early medieval En ...

airport
s. * Supplier agreements – Exclusive agreements with key links in the supply chain can make it difficult for other manufacturers to enter an industry. *
Switching barriersSwitching barriers or switching costs are terms used in microeconomics Microeconomics (from Greek prefix ''mikro-'' meaning "small" + ''economics'') is a branch of economics that studies the behavior of individuals and Theory of the firm, firms ...
– At times, it may be difficult or expensive for customers to switch providers. The objective of switching costs is to hinder buyers to change suppliers, and technological innovation usually would increase or decrease the cost. *
Tariffs A tariff is a tax imposed by a government of a country or of a supranational union on imports or exports of goods. Besides being a source of revenue for the government, import duties can also be a form of regulation of International trade, forei ...
– Taxes on imports prevent foreign firms from entering into domestic markets. * Taxes – Smaller companies typical fund expansions out of retained profits so high tax rates hinder their growth and ability to compete with existing firms. Larger firms may be better able to avoid high taxes through either loopholes written into law favoring large companies or by using their larger tax accounting staffs to better avoid high taxes. *
Zoning Zoning is a method of urban planning Urban planning, also known as regional planning, town planning, city planning, or rural planning, is a technical and political process that is focused on the development and design A design is a plan ...
– Government allows certain economic activity in specified land areas but excludes others, allowing monopoly over the land needed.


Contentious examples

The following examples are sometimes cited as barriers to entry, but don't fit all the commonly cited definitions of a barrier to entry. Many of these fit the definition of antitrust barriers to entry or ancillary economic barriers to entry. *
Economies of scale In microeconomics Microeconomics is a branch of mainstream economics Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that are generally accepted by economists as a basis ...

Economies of scale
– Cost advantages raise the stakes in a market, which can deter and delay entrants into the market. This makes scale economies an antitrust barrier to entry, but they can also be ancillary. Cost advantages can sometimes be quickly reversed by advances in technology. For example, the development of
personal computer A personal computer (PC) is a multi-purpose computer whose size, capabilities, and price make it feasible for individual use. Personal computers are intended to be operated directly by an end user, rather than by a computer expert or technician ...
s has allowed small companies to make use of
database In computing Computing is any goal-oriented activity requiring, benefiting from, or creating computing machinery. It includes the study and experimentation of algorithmic processes and development of both computer hardware , hardware and sof ...

database
and
communication Communication (from Latin Latin (, or , ) is a classical language belonging to the Italic languages, Italic branch of the Indo-European languages. Latin was originally spoken in the area around Rome, known as Latium. Through the power o ...

communication
s technology which was once extremely expensive and only available to large corporations. *
Network effect Image:Metcalfe-Network-Effect.svg, Diagram illustrating the network effect in a few simple phone networks. The lines represent potential calls between phones. As the number of phones connected to the network grows, the number of potential calls avai ...

Network effect
– When a good or service has a value that increases on average for every additional customer, this exerts a similar antitrust and ancillary barrier to that of economies of scale. * Government regulations – A rule of order having the force of law, prescribed by a superior or competent authority, relating to the actions of those under the authority's control. Requirements for licenses and permits may raise the investment needed to enter a market, creating an antitrust barrier to entry. *
Advertising Advertising is a marketing Marketing is the process of intentionally stimulating demand for and purchases of goods and services; potentially including selection of a target audience; selection of certain attributes or themes to emphasi ...

Advertising
– Incumbent firms can seek to make it difficult for new competitors by spending heavily on advertising that new firms would find more difficult to afford or unable to staff and or undertake. This is known as the market power theory of advertising.Moffatt, Mike. (2008)
About.com Dotdash (formerly About.com) is an American digital media Digital media means any media (communication), communication media that operate with the use of any of various encoded machine-readable data formats. Digital media can be created, vi ...

The Market Power Theory of Advertising
'' Economics Glossary – Terms Beginning with M. Accessed June 19, 2008.
Here, established firms' use of advertising creates a consumer perceived difference in its brand from other brands to a degree that consumers see its brand as a slightly different product. Since the brand is seen as a slightly different product, products from existing or potential competitors cannot be perfectly substituted in place of the established firm's brand. This makes it hard for new competitors to gain consumer acceptance. It reflected by brand promoting and the increase of customer loyalties. * Capital – Any
investment Investment is the dedication of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance Finance is the study of financial institution ...

investment
into equipment, building, and raw materials are ancillary barriers, especially including
sunk cost In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods a ...
s. Sunk costs can increasing the strength of barriers to entry. However, it may also lead to monopoly profits, improper resource allocation and low efficiency. And the implementation of capital includes to enable compete or enter the market, the firms need to invest enormous of financial resources to form a barrier to entry, and for the capital-intensive industries, it would need more the financial capital. * Uncertainty – When a market actor has various options with overlapping possible profits, choosing any one of them has an opportunity cost. This cost might be reduced by waiting until conditions are clearer, which can result in an ancillary antitrust barrier. * Cost advantages independent of scale – Proprietary technology, know-how, favorable access to raw materials, favorable geographic locations, learning curve cost advantages. It is reflected by learning curve effects and
economies of scale In microeconomics Microeconomics is a branch of mainstream economics Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that are generally accepted by economists as a basis ...

economies of scale
, and it is one of the most critical barriers to entry strategies. *
Vertical integration In microeconomics Microeconomics (from Greek prefix ''mikro-'' meaning "small" + ''economics'') is a branch of economics that studies the behavior of individuals and Theory of the firm, firms in making decisions regarding the allocation o ...
– A firm's coverage of more than one level of production, while pursuing practices which favor its own operations at each level, is often cited as an entry barrier as it requires competitors producing it at different steps to enter the market at once. *
Research and development Research and development (R&D, R+D), known in Europe Europe is a continent A continent is any of several large landmasses. Generally identified by convention (norm), convention rather than any strict criteria, up to seven geogra ...
– Some products, such as
microprocessors A microprocessor is a computer processor where the data processing logic and control is included on a single integrated circuit, or a small number of integrated circuits. The microprocessor contains the arithmetic, logic, and control circuitr ...
, require a large upfront investment in technology which will deter potential entrants. The existing firms in the market would use efficient investments in research and development to bar the entrants. It depicts in increase technological economies of scale, and boost the industry development, which makes the entrants lack of funding and resource to entre the market. *
Customer loyalty The loyalty business model is a business model used in strategic management In the field of management Management (or managing) is the administration of an organization, whether it is a business, a not-for-profit organization, or governm ...
– Large incumbent firms may have existing customers loyal to established products. The presence of established strong brands within a market can be a barrier to entry in this case. * Control of
resources A resource is a source or supply from which a benefit is produced and that has some utility. Resources can broadly be classified upon their availability — they are classified into renewable and non-renewable resources. They can also be classif ...

resources
– If a single firm has control of a resource essential for a certain industry, then other firms are unable to compete in the industry. * Inelastic demand – One strategy to penetrate a market is to sell at a lower price than the incumbents. This is ineffective with price-insensitive consumers. *
Predatory pricing Predatory pricing is a pricing strategy, using the method of undercutting on a larger scale, where a dominant Domination or dominant may refer to: Society * World domination, which is mainly a conspiracy theory * Colonialism in which one group ( ...
– The practice of a dominant firm selling at a loss to make competition more difficult for new firms that cannot suffer such losses, as a large dominant firm with large lines of credit or cash reserves can. It is illegal in most places; however, it is difficult to prove. ''See
antitrust Competition law is a law Law is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, surrounded and influenced by its environmen ...
.'' In the context of international trade, such practices are often called dumping. *
Occupational licensing Employment is the relationship between two party (law), parties, usually based on a employment contract, contract where work is paid for, where one party, which may be a corporation, for profit, not-for-profit organization, co-operative or ot ...
– Examples include
educational Education is the process of facilitating learning, or the acquisition of knowledge, skills, value (ethics), values, morals, beliefs, habits, and personal development. Educational methods include teaching, training, storytelling, discussion ...
,
licensing A license (American English American English (AmE, AE, AmEng, USEng, en-US), sometimes called United States English or U.S. English, is the set of varieties of the English language native to the United States. Currently, American English ...

licensing
, and quota limits on the number of people who can enter a certain profession. *
Product differentiation In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods a ...
of incumbents - The incumbent firms which show advantages in
advertising Advertising is a marketing Marketing is the process of intentionally stimulating demand for and purchases of goods and services; potentially including selection of a target audience; selection of certain attributes or themes to emphasi ...

advertising
,
brands A brand is a name, term, design, symbol or any other feature that identifies one seller's good or service as distinct from those of other sellers. Brands are used in business Business is the activity of making one's living or making mon ...

brands
, customer loyalties or product differentiation can enable them to be the first in the market. * Number of competitors - During the period when the number of companies is increasing, the possibility of market entry is higher, On the contrary, the likelihood of market entry is less during the period of a large number of business failures. *
Price A price is the (usually not negative) quantity Quantity is a property that can exist as a multitude or magnitude, which illustrate discontinuity and continuity. Quantities can be compared in terms of "more", "less", or "equal", or by ...

Price
- the intensive
price competition Price war is "commercial competition characterized by the repeated cutting of prices below those of competitors". One competitor Competition arises whenever two or more parties strive for a common goal A goal is an idea of the future or ...
can hinder the entrants, who may be unable to set their prices as low as the incumbents. * Technology and technological change - It usually happens in high technology sectors which can have a heavy impact on economies of scale. * Market concentration - Though a minor effect, it can still work against entrants. * Seller concentration - It has a strong effect on the entrants under the high concentration environment, and it is uneasy for them to enter the market. And vice versa. * Divisionalizaition - Typically happens in oligopolistic industries, because it is cheaper for the incumbent to establish a new department compared to the entrants. * Selling expenses - The change in demand function may be endogenous to market entry due to sales efforts. * Incumbent's expected reaction to market entry - If the incumbent firms expect the entrants would cause a threat to them, and incumbents are capable of preventing market entry, they may take action to prevent the entrants from competing. * Possession of strategic raw materials - The ability to access to the strategic raw material would gain advantages for the companies, such as absolute cost advantage.


Classification and examples

Michael Porter Michael Eugene Porter (born May 23, 1947) is an American academic known for his theories on economics, business strategy, and social causes. He is the Bishop William Lawrence University Professor at Harvard Business School Harvard Business Sc ...

Michael Porter
classifies the markets into four general cases : *High barrier to entry and high exit barrier (for example,
telecommunications Telecommunication is the transmission of information by various types of technologies over wire, radio, Optical system, optical, or other Electromagnetism, electromagnetic systems. It has its origin in the desire of humans for communication ov ...
,
energy In physics Physics is the that studies , its , its and behavior through , and the related entities of and . "Physical science is that department of knowledge which relates to the order of nature, or, in other words, to the regula ...
) *High barrier to entry and low exit barrier (for example,
consulting A consultant (from la, consultare "to deliberate") is a professional A professional is a member of a profession or any person who earns their living from a specified professional activity. The term also describes the standards of education and ...
,
education Education is the process of facilitating learning, or the acquisition of knowledge, skills, value (ethics), values, morals, beliefs, habits, and personal development. Educational methods include teaching, training, storytelling, discussion ...

education
) *Low barrier to entry and high exit barrier (for example,
hotel A hotel is an establishment that provides paid lodging on a short-term basis. Facilities provided inside a hotel room may range from a modest-quality mattress in a small room to large suites with bigger, higher-quality beds, a dresser, a ref ...

hotel
s,
ironworks An ironworks or iron works is an industrial plant where iron is smelted and where heavy iron and steel products are made. The term is both singular and plural, i.e. the singular of ''ironworks'' is ''ironworks''. Ironworks succeed Bloomery, bl ...
) *Low barrier to entry and low exit barrier (for example,
retail Retail is the sale of goods In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption ( ...

retail
,
electronic commerce E-commerce (electronic commerce) is the activity of electronically The field of electronics is a branch of physics and electrical engineering that deals with the emission, behaviour and effects of electrons using electronic devices. Electronic ...
) These markets combine the attributes: *Markets with high entry barriers have few players and thus high
profit margin Profit margin, net margin, net profit margin or net profit ratio is a measure of profitability An economic profit is the difference between the revenue a commerce , commercial entity has received from its outputs and the opportunity costs of its ...
s. *Markets with low entry barriers have many players and thus low profit margins. *Markets with high exit barriers are unstable and not self-regulated, so the profit margins fluctuate very much over time. *Markets with a low exit barrier are stable and self-regulated, so the profit margins do not fluctuate much over time. The higher the barriers to entry and exit, the more prone a market tends to be a
natural monopoly A natural monopoly is a monopoly A monopoly (from Greek el, μόνος, mónos, single, alone, label=none and el, πωλεῖν, pōleîn, to sell, label=none) is as described by Irving Fisher, a market with the "absence of competition", cre ...

natural monopoly
. The reverse is also true. The lower the barriers, the more likely the market will become
perfect competition In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...
.


Market structure

#
Perfect competition In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...
: Zero barriers to entry. Due to the perfect competition results in firms are unable to control the prices and produce similar or the same goods, that firms can not form a barrier to entry strategy. #
Monopolistic competition Monopolistic competition is a type of imperfect competitionIn economics, imperfect competition refers to a situation where the characteristics of an economic market do not fulfil all the necessary conditions of a perfectly competitive market, ...
: Medium barriers to entry. Because of the enterprises can earn their short-term revenue through innovation and marketing new products to push the price higher than average costs and marginal costs, which can make barriers to entry higher. However, due to the low cost of the information in monopolistic competition, the barrier of entry lower than in oligopoly or monopoly as new entrants come. #
Oligopoly An oligopoly (from Greek Greek may refer to: Greece Anything of, from, or related to Greece Greece ( el, Ελλάδα, , ), officially the Hellenic Republic, is a country located in Southeast Europe. Its population is approximately 10.7 mi ...
: High barriers to entry, due to the size of the existing enterprises and the competitive advantages gained from that size. #
Monopoly A monopoly (from Greek el, μόνος, mónos, single, alone, label=none and el, πωλεῖν, pōleîn, to sell, label=none) is as described by Irving Fisher, a market with the "absence of competition", creating a situation where a specific ...

Monopoly
: Very high to absolute barriers to entry. The implementation of monopoly including the exciting firms can obtain tremendous profits through pure monopoly market because they want to continue to earn excess profits in the short and long term. Once they gain these profits, the other entrants want to enter the market due to the huge profit. As a result, the existing monopolies would obstacle to prevents new corporations from the distributors or economies of scales. It can be achieved by creating large economies of scales, patent,trademark, etc.


See also

*
Anti-competitive practices Anti-competitive practices are business or government practices that unlawfully prevent or reduce competition Competition is a rivalry A rivalry is the state of two people or groups engaging in a lasting competitive relationship. Rivalry ...
*
Exclusive dealing In Law and economics, Economics and Law, exclusive dealing arises when a supplier entails the buyer by placing limitations on the rights of the buyer to choose what, who and where they deal. This is against the law in most countries which include ...
* Starting a Business Index * Strategic entry deterrence * Zero-profit condition


References

{{Authority control Anti-competitive practices Imperfect competition Monopoly (economics)