Barrier to entry

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In economics, a barrier to entry is an obstacle to a person or firm entering a market. Barriers to entry may be divided into natural and artificial ones. A government monopoly that excludes private competition in a market is generally considered the highest such barrier (see also black market).

Almost all markets have some barriers to entry, as entering a market will usually involve raising capital to purchase factors of production, and advertising to help establish a customer base. However, this will vary considerably between different markets. For example, launching a new mass market car is likely to be much more costly than opening a new shop, as the former will require a large amount of research and development, as well as the cost of setting up a production line, and the necessary advertising.

Generally, barriers to entry put new entrants to a market at a disadvantage, compared to established firms. The new entrant to the market may have to invest a large amount of money before it begins to earn a profit. It may be doubtful if this can be recouped.

There are a number of potential barriers to entry:

  • Some products will require significant research and development before a product can be launched. In some cases existing firms may have patents on some of the technology used in the production of such a product.
  • The existing firms in the market may already have an established brand, with customers loyal to that brand, whereas new firms will have to establish this through advertising and other means, before it can start earning a profit. In some cases the existing sellers in that market may have defined the terms of what a product should be in such a way that it would be very difficult for another firm company to can create such a product.
  • Some markets may require a significant investment in equipment, land, or other items, before production can begin. This would include car production, as mentioned above.
  • Some products may require other firms to produce Complementary goods, in order for the product to be useful. For example, a new format for storing movies (such as blu-ray, or DVD), is unlikely to be successful without a significant number of movies being available in that format.

In general, barriers to entry are largely determined by the market structure of the industry in question.

The Anti-competitive aspect

  • Factors which prevent or deter the entry of new firms into an industry even when the incumbent firms are earning excess profits. There are two broad classes of barriers: structural (economic or innocent) and strategic (behavioral). Structural barriers arise from basic industry characteristics such as technology, costs and demand. Strategic barriers arise from the behavior of incumbents. [1]
  • ... we must not equate the freedom of entry with the mere ability to enter an industry, and conclude that to the extent people are unable to enter an industry for any reason (such as the lack of the necessary capital) the freedom of entry is violated. Thus, for example, if it takes a minimum investment of, say, a billion dollars, to have any hope of competing in the automobile industry, it does not follow at all that the automobile industry lacks freedom of entry or that my freedom of entry as an individual is violated or infringed in any way because I personally cannot raise the necessary billion. [2]