In any industry, there are restrictions in place that are referred to as barriers to entry. Essentially, we are unable to, or have a hard time doing so, join a certain type of market in order to produce goods ourselves. This can vary from perfectly competitive markets to oligopolistic markets, and quite literally everything in between.
Barriers to entry are obstacles that make it difficult or impossible for new firms to enter an industry or market. These barriers protect established businesses from new competitors, allowing them to maintain market dominance. Understanding barriers to entry is crucial for both businesses looking to enter a market and those already in it, as they can shape competitive dynamics.
What are some examples of barriers to entry?
1.) Economies of Scale - Established firms often enjoy lower per-unit costs because they produce on a large scale. New entrants might not have the capacity or resources to produce at the same scale, making it more expensive for them to compete. This gives established firms a cost advantage over potential entrants.
2.) Initial Capital - Starting a business in certain industries requires significant upfront investment. For example, industries like manufacturing, telecommunications, and pharmaceuticals often require large amounts of capital for equipment, research, and facilities. These high costs can discourage new firms from entering the market.
3.) Governmental Regulations - In some markets, government policies, permits, or licenses can create legal barriers. These regulations can limit competition by controlling who can enter certain industries. For example, the pharmaceutical industry requires firms to go through long, expensive processes to get drug approvals from regulatory bodies.
4.) Customer Preference / Being a New Company - Existing firms with well-established brands and loyal customers make it harder for new entrants to gain a foothold. New companies might need to spend heavily on marketing to compete, and even then, they might struggle to attract customers away from trusted brands.
5.) Intellectual Property / Copyright - Patents, trade secrets, and exclusive technologies give firms a competitive edge. A new entrant without access to these assets would need to develop alternative technologies, which could be expensive and time-consuming.
But don't barriers to entry differ amongst market types? Yes! Here's how:
Perfect Competition has no barriers to entry. It is easy to enter this type of market.
Monopolies have high barriers to entry. It is hard to get into these markets.
Monopolistically Competitive markets have small barriers to entry. It is more doable than monopolies but harder than perfectly competitive markets to enter.
Oligopolies have high barriers to entry, making it hard to enter this type of market.
Why Barriers to Entry Matter
Barriers to entry significantly influence how competitive a market is. When these barriers are high, they can decrease innovation and reduce the number of companies able to compete, which ultimately limits consumer choice. However, certain barriers, such as intellectual property protections, can actually foster innovation by giving businesses a chance to recover their investment.
For new companies, it’s important to understand these obstacles in order to develop strategies to overcome them. It can be very hard to start off as a new company when you are competing with monopolies, for example.
The Bottom Line
Barriers to entry are a fundamental term that helps us describe types of market competition. Corporations can use entry barriers to protect their market position and limit competition from new entrants. In order to truly understand market types in economics, we must first understand this valuable term. Because of such barriers to entry, businesses may stay ahead of the game and figure out the best ways to either protect their dominant industries or break into new markets.
