Guys, does anyone know the answer?
get which of the following prevents admittance into a certain industry? from screen.
Barriers to Entry
Barriers to entry are the obstacles or hindrances that make it difficult for new companies to enter a given market. These may include
Barriers to Entry
Obstacles to entering a specific market
Written by CFI Team
Updated November 29, 2022
What are Barriers to Entry?
Barriers to entry are the obstacles or hindrances that make it difficult for new companies to enter a given market. These may include technology challenges, government regulations, patents, start-up costs, or education and licensing requirements.
American economist Joe S. Bain gave the definition of barriers to entry as “an advantage of established sellers in an industry over potential entrant sellers, which is reflected in the extent to which established sellers can persistently raise their prices above competitive levels without attracting new entrants to enter the industry.” Another American economist, George J. Stigler, defined a barrier to entry as, “a cost of producing that must be borne by a firm which seeks to enter an industry but is not borne by firms already in the industry.”
A primary barrier to entry is the cost that constitutes an economic barrier to entry on its own. An ancillary barrier to entry refers to the cost that does not include a barrier to entry by itself but reinforces other barriers to entry if they are present.
An antitrust barrier to entry is the cost that delays entry and thereby reduces social welfare relative to immediate and costly entry. All barriers to entry are antitrust barriers to entry, but the converse is not true.
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.
Barriers to Entry in Different Market Structures
Type of market structure Level of barriers to entry
Perfect competition Zero barriers to entry
Monopolistic competition Medium barriers to entry
Oligopoly High barriers to entry
Monopoly Very high to absolute barriers to entry
Barriers to entry generally operate on the principle of asymmetry, where different firms have different strategies, assets, capabilities, access, etc. Barriers become dysfunctional when they are so high that incumbents can keep out virtually all competitors, giving rise to monopoly or oligopoly.
Thank you for reading this guide on obstacles to entering a specific market. To continue learning and advancing your career as a certified financial modeling analyst, these additional CFI resources will be helpful:
Market Economy Monopoly Law of Supply Economies of ScaleSee all economics resources
Barriers to entry: Factors preventing startup entry into a market
There are 5 sources that make up the barriers to entry into a market. Startups need to understand they role these barriers play in competition.
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Barriers to entry: Factors preventing startups from entering a market
Researching a market? Our free online course Introduction to Market Sizing offers a practical 30-minute primer on market research and calculating market size.Barriers to entry are factors that prevent a startup from entering a particular market. As a whole, they comprise one of the five forces that determine the intensity of competition in an industry (the others are industry rivalry, the bargaining power of buyers, the bargaining power of suppliers and the threat of substitutes). The intensity of competition in a certain field determines the attractiveness of a market (that is, low intensity means that the market is attractive).
Factors involved as barriers to entry may be either innocent (for example, the dominating company’s absolute cost advantage) or deliberate (for example, high spending on advertising by incumbents makes it very expensive for new firms to enter the market).
Barriers to entry act as a deterrent against new competitors. They serve as a defensive mechanism that imposes a cost element to new entrants, which incumbents do not have to bear. Startups need to understand any barriers to entry for their business and market for two key reasons:
Startups might seek to enter a business with high barriers to entry. Doing so would put the startup at a significant disadvantage that is difficult to overcome.
Startups that become market leaders must understand how to protect their position by building barriers to entry.
Sources of barriers to entry into a market
There are seven sources of barriers to entry:
Economies of scale
These are declines in the unit costs of a product as the absolute volume per period increases. These force the entrant to either come in at a large scale (risking strong reaction from incumbents) or a small scale (forcing a cost disadvantage).
Incumbents have brand identification and customer loyalties. This forces entrants to spend heavily to overcome these loyalties. Startups may bring a different product to market, but its benefits must be clearly communicated to the target customer. Startups must find an effective positioning, which often requires marketing resources beyond their means.
These are the financial resources required for infrastructure, machinery, R&D and advertising. Startups may get around capital requirements by outsourcing parts of the operation to companies that can leverage existing investments.
These are one-time costs the buyer faces when switching an existing supplier’s product to a new entrant (for example, employee retraining, new equipment, technical support).
Access to distribution channels
This can be a barrier if logical distribution channels have been locked up by incumbents.
Cost disadvantages independent of scale
Incumbents may have cost advantages that cannot be replicated by a potential entrant. Factors include the learning or experience curve, proprietary product technology, access to raw materials, favourable locations and government subsidies.
Governments can limit or prevent entry to industries with various controls (for example, licensing requirements, limits to access to raw materials). Startups in highly regulated industries will find that incumbents have fine-tuned their business according to regulation.
What response can new entrants expect?
The expected reaction of industry incumbents towards a new entrant influences the prospect or threat of entry by a new competitor. A number of conditions indicate the likelihood of retaliation to entry:
A history of strong retaliation to entrants
Established firms with substantial resources to retaliate (for example, excess cash, distribution channel leverage, excess productive capacity)
Established firms with commitment to the industry and highly illiquid assets
Slow industry growth
Read next: Industry competition and threat of substitutes: Porter’s five forces
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Industry competition and threat of substitutes: Porter’s five forces
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Barriers to Entry: Understanding What Limits Competition
Barriers to entry are the costs or other obstacles that prevent new competitors from easily entering an industry or area of business.
ECONOMICS GUIDE TO MICROECONOMICS
Barriers to Entry: Understanding What Limits Competition
By ADAM HAYES Updated June 04, 2022
Reviewed by MICHAEL J BOYLE
Fact checked by SUZANNE KVILHAUG
Investopedia / Julie Bang
What Are Barriers to Entry?
Barriers to entry is an economics and business term describing factors that can prevent or impede newcomers into a market or industry sector, and so limit competition. These can include high start-up costs, regulatory hurdles, or other obstacles that prevent new competitors from easily entering a business sector. Barriers to entry benefit existing firms because they protect their market share and ability to generate revenues and profits.
Common barriers to entry include special tax benefits to existing firms, patent protections, strong brand identity, customer loyalty, and high customer switching costs. Other barriers include the need for new companies to obtain licenses or regulatory clearance before operation.
Barriers to entry describe the high start-up costs or other obstacles that prevent new competitors from easily entering an industry or area of business.
Barriers to entry benefit incumbent firms because they protect their revenues and profits and prevent others from stealing market share.
Barriers to entry may be caused naturally, by government intervention, or through pressure from existing firms.
Each industry has its own specific set of barriers to entry that startups must contend with.
Barriers to entry may be financial (high cost to enter a market), regulatory (laws restricting trade), or operational (trying to attract loyal customers or inaccessibility of trade channels).
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Barriers to Entry
Understanding Barriers to Entry
Some barriers to entry exist because of government intervention, while others occur naturally within a free market. Often, companies lobby the government to erect new barriers to entry. Ostensibly, this is done to protect the integrity of the industry and prevent new entrants from introducing inferior products into the market.
Generally, firms favor barriers to entry in order to limit competition and claim a larger market share when they are already comfortably ensconced in an industry. Other barriers to entry occur naturally, often evolving over time as certain industry players establish dominance. Barriers to entry are often classified as primary or ancillary.
A primary barrier to entry presents as a barrier alone (e.g., steep startup costs). An ancillary barrier is not a barrier in and of itself. Rather, combined with other barriers, it weakens the potential firm's ability to enter the industry. In other words, it reinforces other barriers.
Barriers to entry may be natural (high startup costs to drill a new oil well), created by governments (licensing fees or patents stand in the way), or by other firms (monopolists can buy or compete away startups).
Government Barriers to Entry
Industries heavily regulated by the government are usually the most difficult to penetrate. Examples include commercial airlines, defense contractors, and cable companies.
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The government creates formidable barriers to entry for varying reasons. In the case of commercial airlines, not only are regulations stout, but the government limits new entrants to limit air traffic and simplifies monitoring. Cable companies are heavily regulated and limited because their infrastructure requires extensive public land use.
Sometimes the government imposes barriers to entry not by necessity but because of lobbying pressure from existing firms. For example, one state requires government licensing to become a florist and four states require government licensing to become an interior designer.
Critics assert that regulations on such industries are needless, accomplishing nothing but limiting competition and stifling entrepreneurship.
Natural Barriers to Entry
Barriers to entry can also form naturally as the dynamics of an industry take shape. Brand identity and customer loyalty serve as barriers to entry for potential entrants. Certain brands, such as Kleenex and Jell-O, have identities so strong that their brand names are synonymous with the types of products they manufacture.
High consumer switching costs are barriers to entry as new entrants face difficulty enticing prospective customers to pay the additional money required to make a change/switch.
Industry-Specific Barriers to Entry
Industry sectors also have their own barriers to entry that stem from the nature of the business as well as the position of powerful incumbents.
Before any company can make and market even a generic pharmaceutical drug in the United States, it must be granted a special authorization by the FDA. The FDA cites that even the most important drugs for general public health may take up to six months to approve.
Although the standard review timeline is around 10 months, more complex drugs or applications may be required to enter this review cycles multiple times due to revisions.