Entry barriers (or barriers to entry) are obstacles that stop or prevent the entrance of a firm in a specific market. It is associated with the situation in which a firm wants to enter a market due to high profits or increasing demand but cannot do so because of these barriers. In Michael Porter’s model of competitive analysis, barriers are a fundamental element to gauge the level of competition in a sector, and relates to the market structure. Here are some of these entry barriers:
Product differentiation: if incumbent firms in the industry have from customers a certain degree of loyalty towards their products, differentiation may be its origin;
Minimum capital requirements: in some industries, high investments may be needed in order to be able to produce;
Complicated change of supplier: if our potential customers find it hard to change suppliers, they might not be willing to change;
Access to distribution channels: of special interest when considering consumer goods, it means that getting the distribution channels to distribute your product may prove hard;
Costa advantages other than economies of scale: such as technology, know-howor simply because of the learning curve;
Government regulation: requirement of permits or licenses such as construction permits or taxi licenses;
Expected reaction from incumbents: if price wars or predatory pricing is expected, this could act as a barrier to entry.
Although barriers may have negative consequences for some firms, for others they will be positive. Where some firms loose other win, it can be regarded as a zero-sum game. For abnormal profits to occur in a market, barriers have to exist. Using Joe Bain’s definition, “barriers give firms the power to maintain in the long-term prices higher than average cost”.
The figure below shows the relation between entry barriers and market structure: