Barriers to Entry
What are barriers to entry?
The obstacles that can get in the way of a new business entering a particular market sector. Some barriers to entry exist naturally, but others are put there deliberately by rival firms.
Where have you heard about barriers to entry?
Brand identity and loyalty schemes are examples of barriers to entry. Well-established companies already have a strong brand and wealth of loyal customers, which makes it hard for competitors to win a share of the market.
A new firm would have to spend loads on advertising to quickly create its own brand following.
What you need to know about barriers to entry.
Barriers to entry are of benefit to companies already operating in an industry because they protect revenues and profits from being driven down by new competitors.
But such obstacles make an industry less competitive, so you can end up with monopolies dominating the market.
Common barriers to entry include:
- High start-up costs. Expenditure such as marketing and specialised technology can deter initial market entry.
- Economies of scale. As firms produce more, their average costs drop. This makes it difficult for start-ups to be competitive.
- Patents. These are legal barriers that prevent others from using the same technology without permission.