This article has multiple issues. Please help improve it or discuss these issues on the talk page. (Learn how and when to remove these template messages) This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed.Find sources: "Barriers to entry" – news · newspapers · books · scholar · JSTOR (October 2020) (Learn how and when to remove this template message) This article is written like a personal reflection, personal essay, or argumentative essay that states a Wikipedia editor's personal feelings or presents an original argument about a topic. Please help improve it by rewriting it in an encyclopedic style. (October 2020) (Learn how and when to remove this template message) This article is in list format but may read better as prose. You can help by converting this article, if appropriate. Editing help is available. (October 2020) (Learn how and when to remove this template message)

In theories of competition in economics, a barrier to entry, or an economic barrier to entry, is a fixed cost that must be incurred by a new entrant, regardless of production or sales activities, into a market that incumbents do not have or have not had to incur.[1] Because barriers to entry protect incumbent firms and restrict competition in a market, they can contribute to distortionary prices and are therefore most important when discussing antitrust policy. Barriers to entry often cause or aid the existence of monopolies and oligopolies, or give companies market power. Barriers of entry also have an importance in industries. First of all it is important to identify that some exist naturally, such as brand loyalty.[2] Governments can also create barriers to entry to meet consumer protection laws, protecting the public. In other cases it can also be due to inherent scarcity of public resources needed to enter a market.[3]

Definitions

Various conflicting definitions of "barrier to entry" have been put forth since the 1950s. This has caused there to be no clear consensus on which definition should be used.[1][4][5]

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

In 1956, 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 1981, Baumol and Willig gave the definition "An entry barrier is anything that requires an expenditure by a new entrant into an industry, but that imposes no equivalent cost upon an incumbent"

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.

In 2011, Wheelen and Hunger gave the definition "an obstruction that makes it difficult for a company to enter an industry".[6]

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][7]

An antitrust barrier to entry is "a cost that delays entry and thereby reduces social welfare relative to immediate but equally costly entry".[1] This contrasts with the concept of economic barrier to entry defined above, as it can delay entry into a market but does not result in any cost-advantage to incumbents in the market. All economic barriers to entry are antitrust barriers to entry, but the converse is not true.

Examples

Porter's Barriers to Entry

An article produced by Michael Porter in 2008 stated that new entrants to an industry have the desire to gain market share, and often substantial resources. The seriousness of the threat of entry depends on the barriers present and on the reaction from existing competitors. Michael Porter's article shows 6 main sources of barriers to entry for entrants:[8]

The first barrier to entry found in the article is the supply-side economies of scale. These scales arise when incumbents produce larger volumes of their product for a lower total cost. This can occur if they spread their fixed costs over more units, utilize a more efficient technology or are on better terms with their suppliers.

The second barrier to entry is the demand-side benefits of scale or network effects. According to Porters article, this arises when a buyer's willingness to pay for a company's product increases with the number of other buyers who also patronize the company. Essentially, through network effects the buyers may trust the larger companies more than smaller ones. This barrier discourages the entrant due to incumbent's embedded data and the structural adjustment programs made internally.

The third barrier is capital requirements for the initial investment and running of a company. Companies often require a large amount of capital when starting to pay for fixed facilities but also produce their inventory and fund start-up losses. The magnitude of the barrier increases if the capital is required for unrecoverable expenditure such as advertising and research and development.

The fourth barrier is incumbency advantages independent of size. For the incumbent, this barrier theoretically gives them a cost and quality advantage over the entrants. Specifically, these are often regarding proprietary technology, preferential access to raw materials, favourable geographic locations, established brand identities and even cumulative experience. This barrier more specifically outlines the favourable traits incumbents adopt over-time due to their established place in the industry, making it unavoidable for entrants in certain industries.

The fifth barrier is the unequal access to distribution channels between the incumbents and the entrants. Most companies require some type of distribution channel for the transport of their product. In the case where entrants cannot bypass this barrier, they end up forming their own distribution channel. The problem for entrants is that the more limited the wholesale and retail channels are, the more competitors have tied them up and consequently the more difficult entry into the industry will be.

The final barrier is restrictive government policy. Importantly, this barrier can either aid or hinder an entrant and even effect the other barriers. Restrictive government policies can block entrance through licensing requirements and restrictions on foreign investments. A clear example these may include the alcohol and taxi industries. Policies can heighten other entry barriers through patenting laws on technologies and even environmental and safety regulations that raise economies of scale for entrants.


Furthermore, a potential new market entrant's expectations about the reaction of the existing competitors within the industry will also be a contributing factor on their decision to enter the market.

An entrant may reconsider entering an industry or choose a new one altogether if incumbents have displayed conscious reactions to entrants in the past. Another discouraging indication for an entrant is if the incumbent is in possession of substantial resources to respond to an entrant. These resources generally consist of excess cash and unused borrowing power. This may also allow for incumbents to lower prices to either keep their market share or lower their excess capacity, another discouraging sign for an entrant.[9]

Primary Economic Barriers to entry

Contentious examples

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.

Classification and examples

Michael Porter classifies the markets into four general cases [citation needed]:

These markets combine the attributes:

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.

Market structure

A structural barrier to entry is a cost incurred by new entrants to a market that is caused by inherent industry conditions, such as upfront capital investment, economies of scale and network effects.[4] For example, the cost to develop a factory and obtain the initial capital required for manufacturing can be seen as a structural barrier to entry.

A strategic barrier to entry is a cost incurred by new entrants that is artificially created or enhanced by existing firms.[4] This could take the form of exclusive contracts, whether supply or demand-side, or through price manipulation in non-competitive markets.

A market with perfect competition features zero barriers to entry.[15] Under perfect competition firms are unable to control prices, and produce similar or identical goods.[16] This means that firms cannot operate strategic barriers to entry. Perfect competition implies no economies of scale;[16] this means that structural barriers to entry are also not possible under perfect competition.

Monopolistic competition can allow for medium barriers to entry. Because the enterprises can earn their short-term revenue through innovation and marketing new products to push the price higher than average costs and marginal costs, barriers to entry can be made higher.[17] However, due to the low cost of the information in monopolistic competition, the barrier of entry is lower than in oligopolies or monopolies as new entrants come.[18]

An Oligopoly will typically see high barriers to entry, due to the size of the existing enterprises and the competitive advantages gained from that size. These competitive advantages could arise from economies of scale, but are also commonly associated with the excess capacity of capital held by incumbent firms,[19] which allows them to engage in temporarily loss-inducing behaviour to force any potential competitor out of the market.[20]

The distinguishing characteristic of a duopoly is a market featuring solely two firms. Competition in a duopoly can vary due to what is being set in the market: price or quantity (see Cournot competition and Bertrand competition). It is generally agreed that a duopoly will feature higher barriers to entry than an oligopoly, as firms within a duopoly have a greater potential for absolute advantage with respect to demand.[21]

A market with a monopolistic firm will often have very high to absolute barriers to entry. The incumbent firm can obtain tremendous profits through a pure monopoly market, therefore there are very large incentives for the creation of strategic barriers, as they want to continue to earn excess profits in the short and long term.[22] These barriers can take several forms, including cost advantage, advertising, and strategic reaction in the form of temporary deviation from equilibrium behaviour.[22]

Barriers to entry in non-economic areas

For political parties the electoral threshold is a barrier to entry to the political competition.[23] One dataset with barriers to entry to the political competition by country is the "Barriers to parties" indicator in V-Dem Democracy indices.[24]

See also

References

  1. ^ a b c d e f g h McAfee, R. Preston; Mialon, Hugo M.; Williams, Michael A. (May 2004). "What Is a Barrier to Entry?" (PDF). American Economic Review. 94 (2): 461–465. doi:10.1257/0002828041302235. Retrieved January 24, 2023 – via California Institute of Technology.
  2. ^ Boyce, Paul (October 25, 2022). "Barriers to Entry Definition". Boycewire.com. Retrieved January 24, 2023.
  3. ^ Hayes, Adam (December 30, 2022). "Barriers to Entry: Understanding What Limits Competition". Investopedia. Retrieved January 24, 2023.
  4. ^ a b c West, Jeremy (January 2007). Competition and Barriers to Entry (PDF) (Technical report). Organisation for Economic Co-operation and Development. Retrieved January 24, 2023.
  5. ^ Lazaroff, Daniel E. (December 2006). "Entry Barriers and Contemporary Antitrust Litigation". UC Davis Business Law Journal. 7 (1). Archived from the original on March 29, 2016. Retrieved January 24, 2023.
  6. ^ Wheelen, Thomas L.; Hunger, J. David (2011). Strategic Management and Business Policy (PDF). Pearson Education. p. 111. Retrieved 21 April 2023.
  7. ^ Shy, Oz; Stenbacka, Rune (December 2005). Entry Barriers and Antitrust Objectives (PDF) (Technical report). Retrieved January 24, 2023 – via ozshy.com.
  8. ^ a b c d e f g h Porter, Michael E. (January 2008). "The Five Competitive Forces That Shape Strategy". Harvard Business Review. 86 (1): 78–137. PMID 18271320. Retrieved January 24, 2023.
  9. ^ Porter, Michael E. (March–April 1979). "How Competitive Forces Shape Strategy". Harvard Business Review. 57 (2): 137–145. Retrieved January 24, 2023.
  10. ^ a b c d e f g h i j k l m n o p q r s Karakaya, Fahri; Stahl, Michael J. (April 1989). "Barriers to Entry and Market Entry Decisions in Consumer and Industrial Goods Markets". Journal of Marketing. 53 (2). Sage Publications: 80–91. doi:10.2307/1251415. JSTOR 1251415. Retrieved 2020-10-31.
  11. ^ Baker, Matthew C.; Stratmann, Thomas (October 2021). "Barriers to entry in the healthcare markets: Winners and Losers from certificate-of-need laws". Socio-Economic Planning Sciences. 77: 101007. doi:10.1016/j.seps.2020.101007. ISSN 0038-0121.
  12. ^ Snider, Connan; Williams, Jonathan W. (2015-12-01). "Barriers to Entry in the Airline Industry: A Multidimensional Regression-Discontinuity Analysis of AIR-21". The Review of Economics and Statistics. 97 (5): 1002–1022. doi:10.1162/REST_a_00455. ISSN 0034-6535. S2CID 57571664.
  13. ^ a b c d Moffatt, Mike (2005). "The Market Power Theory of Advertising". About.com. Archived from the original on April 5, 2008. Retrieved January 24, 2023.
  14. ^ Cullmann, Astrid; Schmidt-Ehmcke, Jens; Zloczysti, Petra (January 2012). "R&D efficiency and barriers to entry: a two stage semi-parametric DEA approach". Oxford Economic Papers. 64 (1): 176–196. doi:10.1093/oep/gpr015. ISSN 0030-7653.
  15. ^ Stigler, George (February 1957). "Perfect Competition, Historically Contemplated". Journal of Political Economy. 65: 1–17. doi:10.1086/257878. S2CID 153919760.
  16. ^ a b Curtis, Doug; Irvine, Ian (2020) [Originally published 2017]. Principles of Microeconomics (PDF). Lyryx Learning. Retrieved 2022-04-20.
  17. ^ Boland, Michael A.; Crespi, John M.; Silva, Jena; Xia, Tian (April 2012). "Measuring the Benefits to Advertising under Monopolistic Competition". Journal of Agricultural and Resource Economics. 37 (1): 144–155. doi:10.22004/ag.econ.122308.
  18. ^ Todorova, Tamara (2021). "Some Efficiency Aspects of Monopolistic Competition: Innovation, Variety and Transaction Costs" (PDF). Theoretical and Practical Research in Economic Fields (TPREF). 12 (24). ASERS Publishing: 82–88. doi:10.14505/tpref.v12.2(24).02. S2CID 157645529. Retrieved January 24, 2023.
  19. ^ Lieberman, Marvin (June 1987). "Excess Capacity as a Barrier to Entry: An Empirical Appraisal". The Empirical Renaissance in Industrial Economics. 35 (4). Wiley: 607–627. doi:10.2307/2098590. JSTOR 2098590.
  20. ^ Ayres, Ian (March 1987). "How Cartels Punish: A Structural Theory of Self-Enforcing Collusion". Columbia Law Review. 87 (2): 295–325. doi:10.2307/1122562. JSTOR 1122562.
  21. ^ Dixit, Avinash (Spring 1979). "A Model of Duopoly Suggesting a Theory of Entry Barriers". The Bell Journal of Economics. 10 (1): 20–32. doi:10.2307/3003317. JSTOR 3003317.
  22. ^ a b Dilek, Serkan; Top, Seyfi (October 2012). "Is Setting up Barriers to Entry Always Profitable for Incumbent Firms?". Procedia - Social and Behavioral Sciences. 8th International Strategic Management Conference. 58. Elsevier: 774–782. doi:10.1016/j.sbspro.2012.09.1055. ISSN 1877-0428.
  23. ^ Tullock, Gordon. "Entry barriers in politics." The American Economic Review 55.1/2 (1965): 458-466.
  24. ^ Sigman, Rachel, and Staffan I. Lindberg. "Neopatrimonialism and democracy: An empirical investigation of Africa's political regimes." V-Dem Working Paper 56 (2017).