Barriers To Entry Definition Top 10 Types Of Barriers To Entry

Barriers to Entry Definition

Barriers to entry are the economic hurdles that a new entrant faces entering that market. In other words, there are the fixed costs that new entrants are liable to pay irrespective of production or sales that may otherwise have not been incurred had the participant not been a new entrant.

Types of Barriers to Entry

Let us learn each one of the types of barriers to entry briefly:

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Capital Costs – New entrants require investment to run a business in the market. For example, they must buy fixed assets to produce or render services.Competition – The new entrants have to face competition from the market stalwarts. Big wigs pose a severe threat to start-ups by being in the market and enjoying market share.Legal Barriers – The government creates hindrances legally to the new entrants by granting a few exclusive rights, patents, etc., to a few companies.Marketing Barriers – As mentioned about the competition earlier, highly established companies can spend massive amounts on advertisements. In contrast, the new companies may not have the capacity, making it harder for them to show their products.Limited Market – When there are too many players, each company shares a little market only.Predatory Pricing – It may not be straightforward With predatory pricingWith Predatory PricingPredatory pricing is a pricing strategy in which the prices of products and services are set at such a low level that it becomes nearly impossible for others to compete in the existing market and forces them to leave.read more prevailing in the market.Finding Suppliers – When existing firms have dominant market control, it may be impossible for new entrants to find suppliers.Mastery of Technology – The existing players may be able to control the technology prevailing in the market, while the new entrants are usually naïve.Learning Curve – With experience comes learning, and understanding comes to speed and perfection. The existing players have this advantage over the new entrants.Economies of Scale – An established firm’s main advantage is having lower production per-unit costs because it can achieve economies of scale.

Examples of Barriers to Entry

Below are some examples of entry barriers: –

Entry Barriers Example #1

To commence a bank is a huge deal. It requires a lot of legal permits and approvals from the government. Also, a lot of compliances can make entry into the market difficult.

Entry Barriers Example #2

Industries like insurance and hospitals, where protection of human life is the main aspect, barriers to entry exist because it is the government’s responsibility to verify if there is proper oversight of the potential entrant to protect life and society’s well-being.

Entry Barriers Example #3

The vehicle industry usually has strong and dominant players in the market who may have done extensive research about consumer preference, costs, road conditions, facilities, etc. They might have spent huge amounts on such research to develop the products displayed on the road and achieve the position that the new entrants cannot afford in a short period.

Advantages of Barriers to Entry

Barriers to entry prevent new entrants from entering the market, producing cheap and inferior products.They protect the existing market players from safeguarding their profits and revenue generation.Barriers to entry help current players concentrate on research and development rather than fighting competition with the new players.The government lays down regulations for players in a few industries like transport to reduce the traffic, pollution, etc.; telecom industries to reduce heavy infrastructureInfrastructureInfrastructure refers to fundamental physical and technological frameworks that a region or industry establishes for its economy to function properly.read more usage, land, etc.They aid the existence of a monopoly and let the existing players enjoy market power and market share.It gives the players a competitive edge.It is also advantageous to consumers because they can receive high-quality products at lower prices due to the competition.

Disadvantages of Barriers to Entry

High entry costs discourage the new entrants to the market, thereby daunting the innovations.Monopoly prevails when new entrants are discouraged, leading to dominance over the consumers.

Conclusion

In a competitive market, the entry of new firms into the industry cuts down the profits and competes away the earnings of the existing players unless the representative firm has just marginal gains.But this may not be the case in a monopoly market because the monopolist may take advantage of the barriers to entry. Moreover, these barriers prevent the entrants from threatening the player’s profits, as discussed above.Likewise, in any other kind of market, i.e., different from a monopoly where existing firms enjoy a market share, an unlimited number of new entrants with new offers and innovations would cause a threat to the stake and the share in profits if there are no barriers to entry.Not only with regards to the existing players, but the government also sets up some regulations and barriers to limit the number of firms in a few industries in the public interest.So we can conclude by saying that, although barriers to entry limit innovation and discourage new firms, it inculcates a sense of responsibility among those willing to enter the market by making entry a little difficult for them.