There are 4 main types of barriers to entry: legal, technical, strategic, and brand loyalty. Legal barriers include patents, licenses, permits, and trade barriers which prevent competitors from entering the market. Technical barriers involve high start-up costs, sunk costs, economies of scale, geographical and technological limitations. Strategic barriers are actions by incumbents like predatory pricing, heavy advertising, being a first mover, and vertical integration to deter new entrants. Brand loyalty forms a barrier when customers favor established brands over new competitors.
There are 4 main types of barriers to entry: legal, technical, strategic, and brand loyalty. Legal barriers include patents, licenses, permits, and trade barriers which prevent competitors from entering the market. Technical barriers involve high start-up costs, sunk costs, economies of scale, geographical and technological limitations. Strategic barriers are actions by incumbents like predatory pricing, heavy advertising, being a first mover, and vertical integration to deter new entrants. Brand loyalty forms a barrier when customers favor established brands over new competitors.
There are 4 main types of barriers to entry: legal, technical, strategic, and brand loyalty. Legal barriers include patents, licenses, permits, and trade barriers which prevent competitors from entering the market. Technical barriers involve high start-up costs, sunk costs, economies of scale, geographical and technological limitations. Strategic barriers are actions by incumbents like predatory pricing, heavy advertising, being a first mover, and vertical integration to deter new entrants. Brand loyalty forms a barrier when customers favor established brands over new competitors.
There are 4 main types of barriers to entry: legal, technical, strategic, and brand loyalty. Legal barriers include patents, licenses, permits, and trade barriers which prevent competitors from entering the market. Technical barriers involve high start-up costs, sunk costs, economies of scale, geographical and technological limitations. Strategic barriers are actions by incumbents like predatory pricing, heavy advertising, being a first mover, and vertical integration to deter new entrants. Brand loyalty forms a barrier when customers favor established brands over new competitors.
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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.