Barriers to entry

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In theories of competition in economics, a barrier to entry, or economic barrier to entry, is a

cost that must be incurred by a new entrant into a market that incumbents don't or haven't had to
incur.
[1][2]

Because barriers to entry protect incumbent firms and restrict competition in a market, they can
contribute to distortionary prices and are therefore are most important when discussing antitrust
policy. Barriers to entry often cause or aid the existence of monopolies or give companies market
power.
Contents
[hide]

1Other definitions

2Primary and ancillary barriers to entry

3Antitrust barriers to entry

4Examples
4.1Contentious examples

5Classification and examples

6Barriers to entry and market structure

7See also

8References

Other definitions[edit]
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.
[1][3][4]

McAfee, Mialon, and Williams list 7 common definitions in economic literature in chronological
order including:
[1][5]

In 1963, 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 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.

Primary and ancillary barriers to entry[edit]

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.
[1][6]

Antitrust barriers to entry[edit]

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 ofeconomic
barrier to entry defined above, as it can delay entry into a market but don't result in any costadvantage to incumbents in the market. All economic barriers to entry are antitrust barriers to
entry, but the converse is not true.
[1]

Examples[edit]
The following examples fit all the common definitions of primary economic barriers to entry.

Distributor agreements - Exclusive agreements with key distributors or retailers can

make it difficult for other manufacturers to enter the industry.

Intellectual property - Potential entrant requires access to equally efficient production

technology as the combatant monopolist in order to freely enter a market. Patents 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 andtechnological progress by guaranteeing proceeds as an incentive.
Similarly, trademarks and servicemarks 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.

Restrictive practices, such as air transport agreements that make it difficult for new
airlines to obtain landing slots at some airports.

Supplier agreements - Exclusive agreements with key links in the supply chain can
make it difficult for other manufacturers to enter an industry.

Switching barriers - At times, it may be difficult or expensive for customers to switch

providers

Tariffs - 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 - Government allows certain economic activity in specified land areas but
excludes others, allowing monopoly over the land needed.

Contentious examples[edit]
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 - 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 computershas allowed
small companies to make use of database and communications technology which was once
extremely expensive and only available to large corporations.
[1]

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.
[1]

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 - 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. Here,
[7]

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.
[7]

[7]

[7]

Capital - Any investment into equipment, building, and raw materials are ancillary
barriers, especially including sunk costs.
[1]

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.
[1]

Cost advantages independent of scale - Proprietary technology, know-how, favorable

access to raw materials, favorable geographic locations, learning curve cost advantages.

Vertical integration - 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 - Some products, such as microprocessors, require a large

upfront investment in technology which will deter potential entrants.

Customer loyalty - 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 - 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 - 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. In the context of international trade, such practices are often
called dumping.

Occupational licensing - Examples include educational, licensing, and quota limits on the
number of people who can enter a certain profession.

Classification and examples[edit]

Michael Porter classifies the markets into four general cases

[citation needed]

High barrier to entry and high exit barrier (for example, telecommunications, energy)

High barrier to entry and low exit barrier (for example, consulting, education)

Low barrier to entry and high exit barrier (for example, hotels, ironworks)

Low barrier to entry and low exit barrier (for example, retail, electronic commerce)

These markets combine the attributes:

Markets with high entry barriers have few players and thus high profit margins.

Markets with low entry barriers have lots of 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. The reverse is also true. The lower the barriers, the more likely the market will
become perfect competition.

Barriers to entry and market structure[edit]

1. Perfect competition: Zero barriers to entry.
2. Monopolistic competition: Medium barriers to entry.
3. Oligopoly: High barriers to entry.
4. Monopoly: Very High to Absolute barriers to entry.

Barriers to exit
From Wikipedia, the free encyclopedia

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In economics, barriers to exit are obstacles in the path of a firm which wants to leave a
given market or industrial sector. These obstacles often cost the firm financially to leave the
market and may prohibit it doing so.
If the barriers of exit are significant; a firm may be forced to continue competing in a market, as
the costs of leaving may be higher than those incurred if they continue competing in the market.
Contents
[hide]

1Types of exit barrier

2Implications

3See also

4References

Types of exit barrier[edit]

The factors that may form a barrier to exit include:

High investment in non-transferable fixed assets. This is particularly common

for manufacturing companies that invest heavily in capital equipment which is specific to one
task.

High redundancy costs. If a company has a large number of employees, employees with
high salaries, or contracts with employees which stipulate high redundancy payments, then
the firm may face significant cost if it wishes to leave the market.

Other closure costs. Contract contingencies with suppliers or buyers and any penalty
costs incurred from cutting short tenancy agreements.

Potential upturn. Firms may be influenced by the potential of an upturn in their market
that may reverse their current financial situation.

Implications[edit]
As more firms are forced to stay in a market, competition increases within that market. This
negatively affects all firms in the market and profits may be lower than in a perfectly competitive
market.