What Are Barriers to Entry
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Q. Using suitable examples define barriers to entry. Explain how barriers to entry affect our firm’s profits. Before a firm can compete in a market, it has to be able to enter it. Many markets have at least some impediments that make it more difficult for a firm to enter a market. A debate over how to define the term “barriers to entry” began decades ago, however, and it has yet to be won. Some scholars have argued, for example, that an obstacle is not an entry barrier if incumbent firms faced it when they entered the market. Others contend that an entry barrier is anything that hinders entry and has the effect of reducing or limiting competition. A number of other definitions have been proposed, but none of them has emerged as a clear favourite. Because the debate remains unsettled but the various definitions continue to be used as analytical tools, the possibility of confusion – and therefore of flawed competition policy – has lingered on for many years. The economist Joseph Stigler defined an entry barrier as "A cost of producing (at some or every rate of output) which must be borne by a firm which seeks to enter an industry but is not borne by firms already in the industry". Barriers to entry are obstacles on the way of potential new entrant to enter the market and compete with the incumbents. The difficulties of entering a market can shelter the incumbents against new entrants. Incumbents' profits are potentially higher than in a truly competitive market, at the expenses of their suppliers and buyers. The higher the barriers to entry, the more power in the hand of the incumbents. According to Ison &Wall (2007), barriers to entry are Impediments, either legal or natural, protecting firms from competition from potential entrants into a market. Giving the firm the legal protection to produce a patented product for a number of years can be a form of a barrier to entry. For example in Zimbabwe the telecommunications industry is a regulated industry. Post and
Q. Using suitable examples define barriers to entry. Explain how barriers to entry affect our firm’s profits. Before a firm can compete in a market, it has to be able to enter it. Many markets have at least some impediments that make it more difficult for a firm to enter a market. A debate over how to define the term “barriers to entry” began decades ago, however, and it has yet to be won. Some scholars have argued, for example, that an obstacle is not an entry barrier if incumbent firms faced it when they entered the market. Others contend that an entry barrier is anything that hinders entry and has the effect of reducing or limiting competition. A number of other definitions have been proposed, but none of them has emerged as a clear favourite. Because the debate remains unsettled but the various definitions continue to be used as analytical tools, the possibility of confusion – and therefore of flawed competition policy – has lingered on for many years. The economist Joseph Stigler defined an entry barrier as "A cost of producing (at some or every rate of output) which must be borne by a firm which seeks to enter an industry but is not borne by firms already in the industry". Barriers to entry are obstacles on the way of potential new entrant to enter the market and compete with the incumbents. The difficulties of entering a market can shelter the incumbents against new entrants. Incumbents' profits are potentially higher than in a truly competitive market, at the expenses of their suppliers and buyers. The higher the barriers to entry, the more power in the hand of the incumbents. According to Ison &Wall (2007), barriers to entry are Impediments, either legal or natural, protecting firms from competition from potential entrants into a market. Giving the firm the legal protection to produce a patented product for a number of years can be a form of a barrier to entry. For example in Zimbabwe the telecommunications industry is a regulated industry. Post and
References: Caves, R. E. and M. E. Porter 1977. From entry barriers to mobility barriers: Conjectural decisions and contrived deterrence to new competition. Quarterly Journal of Economics 91: 241-62. Ison, S. & Wall, S. 2007. Economics (4th Ed). Essex: Pearson Education Mueller, D. C. 1986. Profits in the Long Run. Cambridge, MA: Cambridge University Press. Oster, S. 1990. Modern Competitive Analysis. New York, NY: Oxford University Press. Porter, M. E. 1980. Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York, NY: The Free Press. 6 Stigler, G. 1963. Capital and Rates of Return in Manufacturing Industries. Princeton, NJ: Princeton University Press. Waring, G. F. 1996. Industry differences in the persistence of firm-specific returns. American Economic Review 86: 12531265.