Barriers to entry
- Barriers to entry are obstacles on the way of potential new
entrant to enter the market and compete with the incumbents.
- The difficulties of entering a market can shelter the incumbents
against new entrants.
- Incumbents' profits are potentially higher than in a truly competitive
market, at the expenses of their suppliers and buyers.
- The higher the barriers to entry, the more power in the hand
of the incumbents.
The two most important barriers to entry are:
- Capital requirements
- Government policy and regulations
There are plenty of other potential barriers that might scare new
entrants away:
- Proprietary products and knowledge
- Access to inputs and distribution
- Economies of scale and other cost advantages
- Switching costs and brand identity
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Examples
Industries with high barriers of entry:
- Car making: high upfront capital investment in manufacturing
equipment; compliance with safety and emission rules and regulation,
access to parts suppliers, development of a network of car dealerships,
big marketing campaign to establish a new car brand with consumers.
- Mining: access to inputs restricted through natural distribution
and government licenses, very specific/proprietary exploration
knowledge, big investment in machinery.
Industries with low barriers of entry:
- Computer Hardware retailing: everybody can start a home-based
mail order business for computer parts. It takes little government
permits, wholesaler are open for every reseller, there is no need
to keep large stock, information is freely available on the internet.
- Photography Services: little initial capital investment, no
regulation, no economies of scale (the limiting factors are the
photographer's time and his geographical location).
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