Barriers to Entry are designed to prevent potential competitors from entering the market. Some barriers to entry are placed by the government, while others could be related to cost. These barriers result in different market structures such as monopolies or oligopolies (a few firms). Telecommunications and international logistics are the two industries with some of the highest barriers to entry.
Types of Barriers to Entry
1. Capital Costs
New investments are sometimes required to enter a market. Ex: For new telecom firms to enter the market, they have to lay down all the cable themselves, which is pretty expensive.
2. Economies of Scale
Competitors can’t compete with other firms that have much lower production costs. Ex: Not many firms will be able to enter the soda market and compete against CocaCola.
3. Legal Barriers To Entry
The government creates legal barriers to entry by granting patents, copyrights, and exclusive rights to companies.
A copyright gives the creator of an original creative work exclusive rights to it for a limited time. For example, Disney has the copyright to Mickie Mouse, which allows it exclusive use.
A patent is a limited property right the government gives inventors in exchange for the details of their invention being made public. For example, for patents filed at the US Patent and Trademark Office, inventors are protected for twenty years from the filing date.
4. Marketing Barriers
Existing firms through high spending help create product uniqueness, advertising and brand image & loyalty, which makes it hard for new firms to establish their similar products.
5. Limited Market
Like a natural monopoly or small market size. For example, there aren’t many railway firms in regional sectors, so the government usually controls the railway.
6. Takeover & Merger
Mergers and acquisitions can be used to eliminate competition. For example, there was a recent takeover attempt of T-Mobile by AT&T.
7. Vertical Integration
When firms in the market have control over the raw materials for their products, this makes it harder for newer firms to find suppliers.
8. Predatory Pricing
An illegal practice in which a dominant firm sells at a loss to make the competition more difficult for new firms that cannot suffer such losses. A large dominant firm with large lines of credit or cash reserves can continue to do this until the entrant runs out of money.