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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][2] 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. [3] 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. [4]

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][5][6]

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

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 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.

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][8]

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

Porters Barriers to Entry

An article produced on Michael Porter in 2008 showed stated 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. The following shows the 6 main sources of barriers to entry:[9]

Furthermore, a potential new market entrants expectations about the reaction of the existing competitors within the industry will also be a contributing factor on their decision to enter the market. The company will likely have second thoughts if incumbents have previously lashed out at new entrants or if:

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.[16] 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.[16] 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.[17] Under perfect competition firms are unable to control prices, and produce similar or identical goods.[18] This means that firms cannot operate strategic barriers to entry. Perfect competition implies no economies of scale;[18] 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.[19] 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.[20]

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,[21] which allows them to engage in temporarily loss-inducing behaviour to force any potential competitor out of the market.[22]

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.[23]

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.[24] These barriers can take several forms, including cost advantage, advertising, and strategic reaction in the form of temporary deviation from equilibrium behavour.[24]

See also

References

  1. ^ a b c d e f g h "When Are Sunk Costs Barriers to Entry?" (PDF). caltech.edu. Archived (PDF) from the original on 27 March 2016. Retrieved 3 May 2018.
  2. ^ "Antitrust Aspects of Barriers to Entry" (PDF). micronomics.com. Archived (PDF) from the original on 17 May 2017. Retrieved 3 May 2018.
  3. ^ Boyce, Paul. "Barriers to entry Definition". https://boycewire.com/barriers-to-entry-definition/#The-Importance-of-Barriers-to-Entry. ((cite web)): External link in |website= (help); Missing or empty |url= (help)
  4. ^ Hayes, Adam. "Barriers to Entry". https://www.investopedia.com/terms/b/barrierstoentry.asp. ((cite web)): External link in |website= (help); Missing or empty |url= (help)
  5. ^ "Competition and Barriers to Entry" (PDF). oecd.org. Archived (PDF) from the original on 29 August 2017. Retrieved 3 May 2018.
  6. ^ "Entry Barriers and Contemporary Antitrust Litigation". Archived from the original on 2016-03-29.
  7. ^ "Archived copy" (PDF). Archived (PDF) from the original on 2009-05-21. Retrieved 2009-12-16.((cite web)): CS1 maint: archived copy as title (link)
  8. ^ "Homepage of Oz Shy" (PDF). ozshy.com. Archived (PDF) from the original on 21 December 2016. Retrieved 3 May 2018.
  9. ^ a b c d e f g h Porter, Michael (2008). "The five competitive forces that shape strategy". Harvard Business Review. 86(1): 78–137.
  10. ^ Porter, Michael (2008). "How Competitive Forces Shape Strategy". Harvard Business Review. 86: 78–137.
  11. ^ a b c d e f g h i j k l m n o p q r s Karakaya, Fahri (April 1989). "Barriers to Entry and Market Entry Decisions in Consumer and Industrial Goods Markets". Journal of Marketing. 53 (2): 80–91. doi:10.2307/1251415. JSTOR 1251415. Retrieved 2020-10-31.
  12. ^ Baker, Matthew C.; Stratmann, Thomas (2021-10-01). "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.
  13. ^ 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.
  14. ^ a b c d Moffatt, Mike. (2008) About.com The Market Power Theory of Advertising Archived 2008-04-05 at the Wayback Machine Economics Glossary – Terms Beginning with M. Accessed June 19, 2008.
  15. ^ Cullmann, Astrid; Schmidt-Ehmcke, Jens; Zloczysti, Petra (2012-01-01). "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.
  16. ^ a b West, Jeremy (2007). "Competition and Barriers to Entry" (PDF). Organisation for Economic Co-operation and Development. Retrieved 2022-04-19.
  17. ^ Stigler, George (1957). "Perfect Competition, Historically Contemplated". University of Chicago Press Journals. Retrieved 2022-04-20.
  18. ^ a b Curtis, D (2017). "Principles of Microeconomics". Open Textbook Library. Retrieved 2022-04-20.
  19. ^ Boland, Michael A.; Crespi, John M.; Silva, Jena; Xia, Tian; Boland, Michael A.; Crespi, John M.; Silva, Jena; Xia, Tian (2012). "Measuring the Benefits to Advertising under Monopolistic Competition". Journal of Agricultural and Resource Economics. doi:10.22004/ag.econ.122308. Retrieved 2020-11-01.
  20. ^ Todorova, Tamara (2016). "Some Efficiency Aspects of Monopolistic Competition: Innovation, Variety and Transaction Costs". ((cite journal)): Cite journal requires |journal= (help)
  21. ^ Lieberman, Marvin (1987). "Excess Capacity as a Barrier to Entry". University of Chicago Press Journals. Retrieved 2022-04-22.
  22. ^ Ayres, Ian (1987). "How Cartels Punish: A structural theory of self-enforcing collusion". Columbia Law Review. Retrieved 2022-04-22.
  23. ^ Dixit, Avinash (1979). "A Model of Duopoly Suggesting a Theory of Entry Barriers". The Bell Journal of Economics. Retrieved 2022-04-22.
  24. ^ a b Dilek, Serkan; Top, Seyfi (2012-10-12). "Is Setting up Barriers to Entry Always Profitable for Incumbent Firms?". Procedia - Social and Behavioral Sciences. 8th International Strategic Management Conference. 58: 774–782. doi:10.1016/j.sbspro.2012.09.1055. ISSN 1877-0428.