Barriers to entry

Topics: Barriers to entry, Cost, Costs Pages: 3 (893 words) Published: March 18, 2014
1. Definitions.
Barriers to entry are economic, procedural, regulatory, or technological factors that obstruct or restrict entry of new firms into an industry or market. Barriers to exit are perceived or real impediments that keep a firm from quitting uncompetitive markets or from discontinuing a low-profit product. 2. Types of barriers:

Innocent barriers are those that are part and parcel of the nature of the industry and have not been specially erected by the incumbents to hinder the entry of other firms. Strategic barriers are strategic entry deterrents that stop other firms from entering the market. 3. Innocent barriers.

Cost advantages. The incumbent firm may have exploited the economies of scale that enables it to produce at a lower cost than any would-be new entrant which is passed over onto consumers through lower prices. Sunk costs. Some industries have very high start-up costs or a high ratio of fixed to variable costs that might be unrecoverable if firms leave the industry. This acts as a disincentive to enter the industry. Cost advantages independent of scale. Proprietary technology, know-how, favourable geographic locations, learning curve cost advantages. 4. Strategic barriers.

Patents. They are government enforced intellectual property rights that allow the designer of a product the sole right to the exploitation of the invention for a number of years. They give the owner an exclusive right to prevent others from using their products, ideas, inventions or processes. Vertical integration. Control over supplies and sources of distribution enables the incumbents to deny raw materials and outlets to competitors and maintains their market power. Limit pricing. The existing firms might lower their prices to a level where other firms are unable to compete, and drive them out of the industry. Advertising. The incumbents can spread the fixed costs of advertising over thousands of units which reduces the unit costs of advertising. New entrants to the...
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