American Business


Barriers to entry

Barriers to entry are restrictions preventing or discouraging new competitors from participating in a market. Barriers to entry most often occur in monopolistic and oligopolistic markets, reducing the number of competing firms and increasing prices and profits for those firms protected by barriers to entry. From a social perspective, barriers to entry generally harm consumers, reducing the number of choices available as well as price COMPETITION. From a business perspective, firms attempt to create and maintain barriers to entry. Economists use the term rent-seeking to describe the use of resources by firms on lobbying and influence-buying to acquire MONOPOLY rights from the government, creating a barrier to entry for future entrants. The government, particularly the Antitrust Division of the Justice Department and the Federal Trade Commission, is responsible for monitoring anticompetitive practices in the United States. Potential competitors evaluate the cost of overcoming existing barriers to entry as part of their marketing strategy decisions. Barriers to entry arise from a variety of sources.
• Product differentiation: This is any feature or perceived value to consumers that increases BRAND loyalty and reduces consumer consideration of alternatives in the marketplace. Marketers in the United States spend billions of dollars annually promoting the differences in their products, and offering price incentives for repeat and bulk purchases to existing customers.
ECONOMIES OF SCALE: Products requiring a high initial capital cost, but with low variable costs production, allow existing producers to spread their fixed costs as output expands. Potential competitors are discouraged from entering the market because they cannot start small and later expand as DEMAND grows. Independent retailers such as hardware stores often join in buying franchises in order to obtain the economies of scale in PURCHASING and ADVERTISING of nationally owned competitors.
• Capital requirements: Products or services requiring significant initial INVESTMENT discourage potential competitors. Existing automobile manufacturers, steel producers, and communications companies have spent significant sums creating their enterprises. The investment CAPITAL required for new competitors is a barrier to entry.
• Access to DISTRIBUTION CHANNELs: Often existing firms control access to customers, either through ownership or contractual relationships. Small and new producers frequently have difficulty getting shelf space in retail stores and finding representatives to promote and sell their products through distribution channels.
• Other cost advantages: Through lower rents negotiated in long-term contracts, experience, access to materials, and relationships in the industry, existing companies can often produce at a lower cost than potential competitors, discouraging entry into the marketplace.
• Government policy: LICENSING, PATENTs, safety and pollution standards, and access to distribution create barriers to entry. Patents give a firm a monopoly for a specified period of time. Licenses create costs and tests limiting entry. Many industries seek out government licensing as a way to restrict further entry into their market. Safety and pollution standards increase paperwork and initial costs for would-be competitors. Government restrictions on access to distribution act as a barrier to entry. For example, airline companies fight for government allocation of boarding space at airports around the country.
Information and gaining access to information has traditionally acted as a barrier to entry. Today’s global INTERNET technology is changing this and also creating alternative distribution channels, reducing this barrier to entry.