Barriers to Entry - Definition
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What are Barriers to Entry?
Barrier to entry is a term used in economics throwing light on what challenges a competitor would encounter when entering a specific sector or industry.
Examples of general barriers to entry include:
- high capital asset costs,
- licensing or regulatory approvals,
- exclusive tax-based privileges offered to current organizations,
- patents or other intellectual property rights,
- brand awareness or image,
- Customer Base (loyal customers),
Academics research on Barriers to Entry
- Barriers to entry, Demsetz, H. (1982). Barriers to entry.The American economic review,72(1), 47-57.A welfare analysis ofbarriers to entry, von Weizsacker, C. C. (1980). A welfare analysis of barriers to entry.The bell journal of economics, 399-420. It is widely believed that welfare would be improved by encouraging entry in circumstances where "barriers to entry" (in the sense of Bain) exist. Two models are developed herein which demonstrate that this view is incautious. Economies of scale and product differentiation are both held to be barriers to entry in the Bain scheme of analysis. I show that there are plausible parameter configurations for both economies of scale and goodwill (which is a variant of product differentiation) under which welfare would be improved by increasing, rather than decreasing, the protection of incumbents from the competition of entrants. Greater attention to detail in the analysis of industry circumstances and greater caution in reaching "obvious" welfare conclusions are needed.
- Barriers to entry and market entry decisions in consumer and industrial goods markets, Karakaya, F., & Stahl, M. J. (1989). Barriers to entry and market entry decisions in consumer and industrial goods markets.Journal of marketing,53(2), 80-91. The authors test six market entry barriers in consumer and industrial markets: cost advantages of incumbents, product differentiation of incumbents, capital requirements, customer switching costs, access to distribution channels, and government policy. They model market entry decisions of 137 executives in 49 major U.S. corporations with a decision-making instrument consisting of 32 market entry opportunities. Each respondent's decisions are modeled by regression analysis. The differences in the importance of the six market entry barriers for early and late entry in consumer and industrial goods markets are investigated. The results indicate that marketing executives consider all six barriers in making market entry decisions. The cost advantages of incumbents are considered to be the most important of the market entry barriers. Major differences also are discovered among the other five barriers. Furthermore, the importance of the barriers differs between consumer and industrial goods markets.
- Seller concentration, barriers to entry, and rates of return in thirty industries, 1950-1960, Mann, H. M. (1966). Seller concentration, barriers to entry, and rates of return in thirty industries, 1950-1960.The Review of Economics and Statistics, 296-307.
- Economies of scale and barriers to entry, Schmalensee, R. (1981). Economies of scale and barriers to entry.Journal of political Economy,89(6), 1228-1238. Dixit has recently presented a model in which established firms select capacity to discourage entry but cannot employ threats they would not rationally execute after entry. Entry deterrence in a slight modification of this model involves the classical limit-price output. Under linear or concave demand, however, the capital cost of a firm of minimum efficient scale is an upper bound on the present value of the monopoly profit stream that can be shielded from entry. It is argued that this suggests the general unimportance of entry barriers erected by scale economies.