Posted in Finance, Accounting and Economics Terms, Total Reads: 477
Definition: Barriers to Entry
The cost of entering a business is what is essentially termed as barriers to entry. In other words, the additional obstacles that a new entrant has to overcome as against an incumbent firm are barriers. These include high costs of starting up, legal permissions, opposition to government intervention, varying tax policies and the like. While some of them are externally put and avoidable, others are natural and quite unavoidable like high amounts of investment needed to set the firm up before it can start recovering all its fixed and variable costs.
These barriers have a direct positive impact on the incumbent’s revenues and profits so it would be reasonably acceptable to think that they would want these barriers to be existing and high. Other intangible costs would be strong existing customer base for the incumbent firms, patents, high costs of brand switching or even the difference in the perceived credibility between the new and the experienced. In Microeconomic oligopoly market, it is a quintessential factor determining whether or not a new firm will enter the market given the entry barriers.
The different natural barriers to entry can be:
i. High capital investments
ii. Economies of scale
iii. High R&D costs
iv. Network Effects
v. Government Regulation
vi. Product Differentiation
The Artificial or strategic barriers to entry can be:
i. High advertising requirements
ii. Control of resources is with a single company that controls the industry
iii. Predatory Pricing
iv. Limit Pricing
v. Switching Costs
vi. Loyalty Schemes
vii. Vertical Integration
In a perfect competition market there will be zero barriers of entry where as in a monopolistic market there will be very high barriers of entry.
Railway industry needs intensive capital requirements, is based on economies of scale, have numerous government regulations, and requires high R&D costs. So entry barriers in railway industry are very high.