Question

What is a barrier to entry? Give some examples.

Short answer

A barrier to entry is an obstacle that makes it difficult for new firms to enter an industry or market and compete with existing firms. These barriers can be economic, legal, or regulatory in nature. Examples of barriers to entry include high start-up costs, economies of scale, patents and intellectual property protection, government regulations, and strong brand loyalty.

Step-by-step solution

Definition of Barrier to Entry

A barrier to entry is an obstacle that makes it difficult for new firms to enter into an industry or market and compete with existing firms. These barriers can be economic, legal, or regulatory in nature and serve to protect the market share and profits of established businesses while discouraging new competition.

Example 1: High Start-up Costs

High start-up costs can act as a barrier to entry, as potential new entrants may be unable to afford the initial investment required to begin operations. For example, in the airline industry, the cost of purchasing or leasing aircraft, hiring staff, and setting up airport facilities can be prohibitively expensive for new entrants.

Example 2: Economies of Scale

Existing firms with large market shares may be able to take advantage of economies of scale, meaning they can produce goods or services at a lower cost per unit due to high volume production. This can create a barrier to entry, as new entrants may struggle to match the low production costs of established firms. A good example is the automobile manufacturing industry, where established companies have massive production plants that allow them to produce cars more efficiently compared to new entrants.

Example 3: Patents and Intellectual Property

Patents and other forms of intellectual property protection can act as barriers to entry by granting exclusive rights to develop, manufacture, or sell a particular product or technology. New firms attempting to enter an industry may be unable to compete if they cannot access these protected technologies. An example of this is the pharmaceutical industry, where patents on new drugs can prevent other companies from producing generic versions for a specific period.

Example 4: Government Regulations

Government regulations can also act as barriers to entry. Industries that are heavily regulated, such as banking or utilities, often have higher entry costs due to requirements for obtaining licenses, meeting regulatory standards, and dealing with compliance issues. This can deter new businesses from entering the market and competing with existing firms.

Example 5: Brand Loyalty

Strong brand loyalty can be a barrier to entry, particularly in industries where consumers place high value on the reputation of a company, such as luxury goods or technology. Established firms with loyal customer bases may be difficult to compete with, as consumers may be resistant to switching to a new, untested company. Examples include Apple in the technology industry or Rolex in the luxury watch market.