Barriers to entry
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Barriers to entry is a term used in economics and especially the theory of competition to refer to obstacles placed in the path of a firm who wants to enter a given market. It may refer either to an individual who is barred from entering some profession or trade, or to a firm or indeed a country that is barred somehow from entering an industry or trade grouping.
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Barriers to entry for individuals into the job market
Examples of barriers restricting individuals from entering a job market include; Educational or quota limits on the numbers of people who can enter the profession of lawyer, and educational and experiential requirements for people who wish to be neurosurgeons. Whilst both sets of barriers to entry may and do guarantee that people entering those fields are suitably qualified, the barriers to entry also reduce competition and have the effect of facilitating premium pricing of the skills. That is if just anyone could enter those fields, then the salaries would be expected to be lower.
Barriers to entry for firms into a market
Barriers to entry into markets for firms include;
- Government regulations, may make entry more difficult, safety regulations for example may raise the investment needed to enter a market.
- Predatory pricing, the practice of a dominant firm selling at a loss to make competition more difficult for new firms who cannot suffer any losses as a large dominant firm can. It is normally illegal.
- Patents, these give a firm the sole right to produce a product for a given period of time.
- Cost advantages, large experienced firms can generally produce goods at lower costs than small inexperienced firms.
- Customer loyalty, large incumbent firms may have existing customers loyal to established products.
- Advertising, incumbent firms can seek to make it difficult for new competitors by spending heavily on advertising that new brands would find it more difficult to afford.
- Research and development, some products, such as microprocessors require a massive investment in technology, this will deter potential entrants.
- Sunk costs, sunk costs cannot be recovered if a firm decides to leave a market, therefore increase the risk and deter entry.
- Restrictive practices, such as air transport agreements that make it difficult for new airlines to obtain landing slots at some airports.
- Distributor agreements, exclusive agreements with key distributors or retailers can make it difficult for other manufacturers to enter the industry.
- Supplier agreements, exclusive agreements with key links in the supply chain can make it difficult for other manufacturers to enter the industry.
Other types of barrier to entry
Countries can encounter barriers to entry e.g. as witnessed by the long delays that some countries have encountered in their applications to join the European Community.