Barriers To Entry Examples

Download as docx, pdf, or txt
Download as docx, pdf, or txt
You are on page 1of 4

Barriers to Entry Examples – 4 Types

Barriers to entry can be categorised under 4 separate types: legal, technical,


strategic, and brand loyalty.

1. Legal Barriers to Entry


 Patents
A patent is a government-backed barrier to entry. It issues the exclusive right
to produce a good for a given period of time, so competitors are legally
prevented from entering the market. Some notable examples include
pharmaceutical products and many in the field of technology.
Licenses/permits
Licenses and permits are another government granted barrier to entry. These
are usually issued by the government to maintain quality, but reduce the level
of competition at the same time. As a result, new businesses or individuals will
find it hard to enter.
Trade Barriers
When governments introduce quotas, tariffs, and other trade restrictions –
they also restrict competition. If imported goods become too expensive due to
tariffs, then customers won’t buy them – it becomes uncompetitive when
compared to domestic suppliers. Consumers are more likely to buy from a
domestic supplier that is half the price than a foreign import.
Standards and regulation
These can add extra costs to new entrants. First of all, it takes time, money,
and effort to get the business up to speed with regulations. Restaurants, in
particular, have a number of health and safety and other forms of regulation
that owners need to be aware of.
2. Technical Barriers to Entry
 High Start-up Costs
 Sunk Costs
 Economies of Scale
 Geographical
Technological Knowledge

3.Strategic Barriers to Entry


 Predatory Pricing
Heavy Advertising
First Mover
 Vertical integration
4.Brand Loyalty – Barrier to Entry
Types of Barriers to Entry

There are two types of barriers:

1. Natural (Structural) Barriers to Entry

 Economies of scale: If a market has significant economies of scale


that have already been exploited by the existing firms to a large
extent, new entrants are deterred.
 Network effect: This refers to the effect that multiple users have on
the value of a product or service to other users. If a strong network
already exists, it might limit the chances of new entrants to gain a
sufficient number of users.
 High research and development costs: When firms spend huge
amounts on research and development, it is often a signal to the new
entrants that they have large financial reserves. In order to compete,
new entrants would also have to match or exceed this level of
spending.
 High set-up costs: Many of these costs are sunk costs that cannot be
recovered when a firm leaves a market, such as advertising and
marketing costs and other fixed costs.
 Ownership of key resources or raw material: Having control over
scarce resources, which other firms could have used, creates a very
strong barrier to entry.

2. Artificial (Strategic) Barriers to Entry

 Predatory pricing, as well as an acquisition: A firm may


deliberately lower prices to force rivals out of the market. Also, firms
might take over a potential rival by purchasing sufficient shares to
gain a controlling interest.
 Limit pricing: When existing firms set a low price and a high output
so that potential entrants cannot make a profit at that price.
 Advertising: These are sunk costs. The higher the amount spent by
incumbent firms, the greater the deterrent to new entrants.
 Brand: A strong brand value creates loyalty of customers and, hence,
discourages new firms.
 Contracts, patents, and licenses: It becomes difficult for new firms
to enter the market when the existing firms own licenses, patents, or
exclusivity contracts.
 Loyalty schemes: Special schemes and services help oligopolists
retain customer loyalty and discourage new entrants who wish to
gain market share.
 Switching costs: These are the costs incurred by a customer when
trying to switch suppliers. It involves the cost of purchasing or
installing new equipment, loss of service during the period of change,
the efforts involved in searching for a new supplier or learning a new
system. These are exploited by suppliers to a large extent in order to
discourage potential entrants.

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy