Barriers to entry

Competition law
Basic concepts
Anti-competitive practices
Enforcement authorities and organizations

In theories of competition in economics, barriers to entry are obstacles that make it difficult to enter a given market.[1] The term can refer to hindrances a firm faces in trying to enter a market or industry - such as government regulation, or a large, established firm taking advantage of economies of scale - or those an individual faces in trying to gain entrance to a profession - such as education or licensing requirements.

Because barriers to entry protect incumbent firms and restrict competition in a market, they can contribute to distortionary prices. The existence of monopolies or market power is often aided by barriers to entry.

Contents

[hide]

Definitions

George Stigler defined an entry barrier as “A cost of producing which must be borne by a firm which seeks to enter an industry but is not borne by firms already in the industry”.[2]

“ A barrier to entry is anything that prevents entry when entry is socially beneficial ”

—Diagnosing Monopoly (1979)[3], Franklin M. Fisher

Joe S. Bain defined as a barrier to entry anything that allows incumbent firms to earn supranormal profits without threat of entry.[4]

Barriers to entry for firms into a market

Barriers to entry into markets for firms include:

Barriers to entry for individuals into the job market

Examples of barriers restricting individuals from entering a job market include educational, licensing, or quota limits on the number of people who can enter a certain profession such as that of lawyer, and educational, licensing, and experiential requirements for people who wish to be neurosurgeons.

Whilst both types of barriers to entry attempt to guarantee that people entering those fields are suitably qualified, the barriers to entry also reduce competition. This has the effect of facilitating premium pricing for the services of regulated professions. That is, if just anyone could enter these fields, the income of the incumbents would be expected to be lower.

Classification and examples

Michael Porter classifies the markets into four general cases:

The higher the barriers to entry and exit, the more prone a market tends to be a natural monopoly. The reverse is also true. The lower the barriers, the more likely the market will become perfect competition.

Barriers to entry and market structure

  1. Perfect competition: Zero barriers to entry.
  2. Monopolistic competition: Low barriers to entry.
  3. Oligopoly: High barriers to entry.
  4. Monopoly: Very High to Absolute barriers to entry.

See also

References

  1. ^ Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 153. ISBN 0-13-063085-3. http://www.pearsonschool.com/index.cfm?locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&PMDbProgramId=12881&level=4. 
  2. ^ . JSTOR 3592928. 
  3. ^ http://www.mcafee.cc/Papers/PDF/Barriers2Entry.pdf
  4. ^ Tirole, Jean (1989). The Theory of Industrial Organization. Cambridge, Massachusetts, London, England: The MIT Press. pp. 305. ISBN 0-262-20071-6. 
  5. ^ a b c d Moffatt, Mike. (2008) About.com The Market Power Theory of Advertising Economics Glossary - Terms Beginning with M. Accessed June 19, 2008.