Barrier To Entry

A barrier to entry (or barriers to entry) is an economic term used to define the conditions that make entry of a firm into a certain market or sector of the economy difficult. Companies find it extremely difficult to establish a base in such a market dominated by a well-established firm. The market then becomes a monopoly of that firm or duopoly of two such firms. In a market-driven by competition, profits made by the incumbents comes at the cost of their buyers and suppliers. It has been observed that markets that have higher barriers to entry act as sustainable competitive advantages and produce powerful incumbents.

Factors that can act as barriers to entry

• Governmental policies and legislation, apart from capital requirements
• Branding
• Network effects
• Network externalities composed of multiple network effects
• Lower production costs
• Access to distribution
• Access to inputs
• Intellectual property

Industries with high or low barriers to entry

Some of the industries that have high barriers to entry include mining and car making. Photographic services and computer hardware retailing have low barriers to entry.

Barrier to exit or barriers to exit

A barrier to exit (or barriers to exit) refers to the challenges faced by companies, which find it tough to withdraw from a particular market, especially after realizing that it is hardly profitable. Player recedes to the lowest position in the market. Profit made by the incumbents of the market is comparatively lower. The factors that resist an exit from a market include lack of ways to obtain profit from the assets, in which investment has already been made. Aviation and wireless telecommunications industry have high barriers to exit while personal care services and the retail industry have low barriers to exit.

Perfect Competition

Perfect competition in a market exists when the following five economic imperatives are met:

• All companies retail the same product
• All participating companies are price takers
• All companies have a comparatively low market share
• Buyers have knowledge of the product sold and the prices charged for that product by each company
• Companies may enter and exit the industry at their discretion; which means there is no barrier to entry or exit

Perfect competition exists only in a theoretical market structure.

Monopoly

Monopoly is a market condition where a single commercial entity like a group or company controls all or nearly all of the market for a specific product or service. This market condition is marked by a noted absence of competition- resulting in low-quality products and high product prices.

Cite Term

Definition Sources