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Barriers to entry are those characteristics of an industry that prevent potential competitors from entering. Some barriers to entry may be naturally occurring while others may be created, either by the firm or the government, in an attempt to reduce competition.
Examples of natural barriers to entry include:
• high costs of entry – some industries require a large initial investment which may be beyond the means of most firms, example energy generation and supply, telecommunications
• economies of scale – in some industries economies of scale occur at very high levels of output which results in only a few firms being able to reach the level of output required to produce efficiently
• ownership by one firm of essential raw materials
• high natural sunk costs.
Examples of artificial barriers to entry include:
• government restrictions – it is illegal to enter some industries without a government licence. radio broadcast, postal service, sale of alcohol
• brand proliferation – some firms produce a wide range of similar products under different brand names in an attempt to create the perception of a highly competitive market and so deter potential competitors from entering
• saturation advertising – in some cases firms spend huge amounts on advertising in an attempt to deter possible entrants. If new firms wish to compete with the more established firms they will have to spend similar amounts on advertising. However, this is beyond the means of most small firms
• limit and predatory pricing.
marlinbito answered the question on July 5, 2018 at 14:34
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