Barrier To Entry

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Definition: Barrier To Entry


Barrier To Entry

Quick Summary of Barrier To Entry


Circumstances particular to a given industry that create disadvantages for new competitors attempting to enter the market. These may include government regulations, economic factors, and marketing conditions. Barriers to entry may be created, for example, when companies already in a market have patents that prevent their goods from being copied, when the cost of the advertising needed to gain a market share is too high, or when an existing product commands very strong brand loyalty.



Video Guide For Barrier To Entry




Full Definition of 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 come 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. The 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 a lack of ways to obtain profit from the assets, in which investment has already been made. The 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.


Related Phrases


Cost to Build
Private Equity
Strategic Buyer
Valuation Premium
Financial Buyer
Reverse Due Diligence


Barrier To Entry FAQ's


What Does Barriers to Entry Mean?

The term “barriers to entry” refers to any major challenges that a new entrant faces while entering a market dominated by an existing enterprise. Both strategic and financial purchasers seek to acquire companies with high entry barriers since they are difficult to create internally and keep competition to a minimum, allowing for stronger pricing power. Acquirers will normally pay a premium for companies that can demonstrate considerable obstacles to entry.

Barriers to entry are roughly classified into three types;

  • Agreements, contracts, patents, trademarks, copyrights, and/or regulatory protection are all examples of legal or regulatory barriers. Vendors must explicitly specify the level of protection and the scope of the protection.
  • Brands, customer/supplier connections, distribution methods, trade secrets, exclusive agreements, geography, and so on are examples of market obstacles. Vendors should disclose how they built market barriers and how they intend to protect them.
  • Capital constraints include large investments in fixed assets, hefty regulatory certification expenses, considerable research and development, and so on. Documentation of all areas of capital necessary for new market entrants will provide proof of these obstacles and will go a long way toward gaining a premium valuation from a buyer.

Cite Term


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August 08, 2022 https://payrollheaven.com/define/barrier-to-entry/.
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Barrier To Entry. PayrollHeaven.com. Payroll & Accounting Heaven Ltd.
https://payrollheaven.com/define/barrier-to-entry/ (accessed: August 08, 2022).
American Psychological Association (APA):
Barrier To Entry. PayrollHeaven.com. Retrieved August 08, 2022
, from PayrollHeaven.com website: https://payrollheaven.com/define/barrier-to-entry/

Definition Sources


Definitions for Barrier To Entry are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 21st January, 2022 | 0 Views.