Barrier to entry

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In trade economics, a barrier to entry is an obstacle to a firm entering a market. Almost all markets have some barriers to entry, as entering a market will usually involve raising capital to buy premises, 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 starting 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 establish firms. The new entrant to the market may have to invest a large amount of money before it begins to make 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.