A Detailed Explanation of Barriers to Entry in Economic Terms
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Barriers to entry – What is it?
It is anything that is an obstacle for a firm entering a new area of business. These are obstacles that new competitors face on entering a new industry. Examples can be: –
- Tax benefits for existing firms
- High startup costs
- High switching costs of customers
- Strong brand identity
- Licensing requirements
Who creates them?
Barriers to entry are an overall cause of the industry as a whole. It is created by government, existing companies and in some cases the end users. This brings us to the various types of it.
They can be loosely segregated into branches. Government made and natural causes. However, in economic terms, this field is further sub-divided into other types. Some of the examples are promotional costs, economies of scale, technology etc.
Types of Barriers to Entry
- Government regulations
The government may put strict licensing requirements. It may also have a restrictive raw material procurement policy.
- Product Differentiation
Product Differentiation is to set apart a similar product by a new entrant. Usually all products of the same industry are similar. However, a new entry to the market needs to claim his product as superior and different.This entails brand recognition, aggressive advertising, network building etc.
- Economies of scale
The term means when a firm is able in producing a given product at its optimal cost and profit. For new firms this means competing with well established businesses who already know the ropes.
- Distribution channels
This is about the raw material procurement channel. Sometimes, existing business have monopoly over suppliers of raw material. This makes procurement difficult for new entrants.
In today’s world, technology plays a key role in any industry. Many times a particular technology might be patented. This creates monopoly in the market and prevents new entrants to set up shop.
Why are they important?
Barrier to entry of a new firm in an existing market isvery important.From an economic stand-point they are put in place to prevent flooding. Existing firms within an industry put pressure on the government to create these barriers. Such practices protect industry integrity.
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