Barriers to Entry
In economics, the term barriers to entry refers to obstacles that make it difficult for new firms to enter into a given market or industry. Barriers to entry are strongest in pure monopolistic markets where entry is virtually blocked for new firms. Barriers to entry gradually become weak as markets become competitive. There are no entry barriers markets that have pure competition. In real world though, all new firms face at least some barriers.
Barriers to entry are difficult to classify and some are overlapping. Major factors that prohibit new firms from entering a given business are:
Economies of Scale
Old firms in a market are typically much larger than new startups. Large firms can produce a given product or service at a much lower cost per unit than new firms due to economies of scale. New firms cannot beat the price of larger firms without incurring loss. This makes it difficult for newer firms to enter and stay profitable.
In some industries government regulations are an obstacle in the way of new firms. Sometimes there is simply a limit on the number of firms allowed to operate in a given industry e.g. limited number of 4G communication licenses. Even when there is no limit on number of licenses, some firms may find it hard to obtain license to run a particular type of business due to huge costs or other difficulties.
International trade restrictions exist in various forms. These are enforced by governments to protect domestic producers from fierce international competition.
Patents on technology owned by existing firms make it difficult for new firms to compete because either they need to pay high licensing costs or invest in research trying to invent alternate technology.
Restricting Trade Practices
Existing firms sometimes engage in restricting trade practices such as collusion or limit pricing thus making it difficult for new firms to enter in the industry.
Written by Irfanullah Jan