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Barrier to entry
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In economics, barrier to entry (also barrier to competition, entry barrier or market entry barrier) refers to a startup cost or other obstacle for a firm attempting to enter an existing industry or market in which the firm was not previously participating. Barriers to entry may be inherent to an industry (sometimes known as structural or natural barriers) or deliberately erected by incumbent firms or the government (sometimes known as strategic or artificial barriers).[1][2][3][4]
Background
Harold Demsetz, at the time a professor of economics at the University of California, Los Angeles, claimed in a 1981 working paper, "The notion of 'barriers to entry' plays an important role in both economic theory and in the practical economics of antitrust litigation." He also claimed that among economists there was a "lack of agreement about the content of the barriers to entry notion."[2]
The Organisation for Economic Co-operation and Development (OECD), an international association of 35 countries as of August 2017, stated the following in a 2007 policy brief about barriers to entry:[1][5]
| “ | Before a firm can compete in a market, it has to be able to enter it. Many markets have at least some impediments that make it more difficult for a firm to enter a market. A debate over how to define the term 'barriers to entry' began decades ago, however, and it has yet to be won. Some scholars have argued, for example, that an obstacle is not an entry barrier if incumbent firms faced it when they entered the market. Others contend that an entry barrier is anything that hinders entry and has the effect of reducing or limiting competition. A number of other definitions have been proposed, but none of them has emerged as a clear favourite.[6] | ” |
| —Organisation for Economic Co-operation and Development (2007)[1] | ||
Types of barriers to entry
Several sources, including the OECD, MaRS, and Economics Online, have described two categories of barriers to entry:[1][4][7]
- Structural or natural barriers to entry
- Includes industry-specific conditions, such as the need for a large capital investment, economy of scale, or ownership of a scarce resource
- Strategic or artificial barriers to entry
- Barriers erected or enhanced deliberately through means including government policy and regulation, advertising and consumer loyalty, or pricing.
In its policy brief, the OECD argued that legal barriers to entry, both statutory and regulatory, could be structural or strategic, depending on if incumbent firms attempted to convince the government to implement a favorable legal barrier.[1] In a description of barriers to entry, economics instructor Geoff Riley named statutory barriers, "entry barriers given force of law," as a separate third category of barriers to entry.[8] As of September 2017, the online financial and business encyclopedia Investopedia named two categories of barriers to entry, government and natural.[9]
Examples of barriers to entry
According to a business encyclopedia maintained by Inc. magazine, a literature search conducted by marketing professor Fahri Karakaya found the following examples of barriers to entry:[10]
| “ | 1) absolute cost advantages enjoyed by the incumbent, 2) economies of scale, 3) product differentiation, 4) the degree of firm concentration, 5) capital requirements to enter a market, 6) customers' cost of switching, 7) access to distribution channels, and 8) government policy.[10][6] |
” |
These findings were originally published in a 2002 article, "Barriers to Entry in Industrial Markets," in the Journal of Business and Industrial Marketing.[10]
Definitions from economists
A selection of definitions of this concept from professors of economics and political science can be found below.
Joe S. Bain
| “ | The extent to which, in the long run, established firms can elevate their selling prices above the minimal average costs of production and distribution ... without inducing potential entrants to enter the industry.[6] | ” |
| —Joe S. Bain, Industrial Organization (1968)[2] | ||
James M. Ferguson
| “ | Factors that make entry unprofitable while permitting established firms to set prices above marginal cost, and to persistently earn monopoly returns.[6] | ” |
| —James M. Ferguson, Advertising and Competition: Theory, Measurement, Fact (1974)[2] | ||
Paul M. Johnson
| “ | Conditions or circumstances that make it very difficult or unacceptably costly for outside firms to enter a particular market to compete with the established firm or firms that are already selling the good or service involved.[6] | ” |
| —Paul M. Johnson, A Glossary of Political Economy Terms (online edition)[11] | ||
George J. Stigler
| “ | A cost of producing (at some or every rate of output) which must be borne by a firm which seeks to enter an industry but is not borne by firms already in the industry.[6] | ” |
| —George Stigler, The Organization of Industry (1968)[2] | ||
See also
External links
Footnotes
- ↑ 1.0 1.1 1.2 1.3 1.4 Organisation for Economic Co-operation and Development, "Policy Brief: Competition and Barriers to Entry," January 2007
- ↑ 2.0 2.1 2.2 2.3 2.4 UCLA Department of Economics, "Barriers to Entry," January 1981
- ↑ Business Dictionary, "Barrier to entry," accessed August 28, 2017
- ↑ 4.0 4.1 MaRS, "Barriers to entry: Factors preventing startups from entering a market," December 6, 2013
- ↑ Organisation for Economic Co-operation and Development, "About the OECD," accessed August 28, 2017
- ↑ 6.0 6.1 6.2 6.3 6.4 6.5 Note: This text is quoted verbatim from the original source. Any inconsistencies are attributable to the original source.
- ↑ Economics Online, "Barriers to entry," accessed September 4, 2017
- ↑ Tutor2u, "Barriers to Entry and Exit," accessed September 4, 2017
- ↑ Investopedia, "Barriers To Entry, accessed September 4, 2017
- ↑ 10.0 10.1 10.2 Inc., "Barriers to Market Entry," accessed September 4, 2017
- ↑ A Glossary of Political Economy Terms, "Barriers to entry," accessed August 28, 2017
