Barriers to entry

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In theories of competition in economics, barriers to entry, also known as barrier 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 and patents, 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.

Definitions[edit]

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]

Franklin M. Fisher gave the definition "anything that prevents entry when entry is socially beneficial."[3]

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

Barriers to entry for firms into a market[edit]

Barriers to entry into markets for firms include:

Barriers to entry for individuals into the job market[edit]

Examples of barriers restricting individuals from entering a job market include educational, licensing, and quota limits on the number of people who can enter a certain profession.[citation needed]

Classification and examples[edit]

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[edit]

  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[edit]

References[edit]

  1. ^ Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. p. 153. ISBN 0-13-063085-3. 
  2. ^ What Is a Barrier to Entry?. JSTOR 3592928. Retrieved 9 July 2013. 
  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. p. 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.