Question

What are barriers to entry? How do barriers to entry work?

Answer 1

Barriers to entry are the economic concept that defines the presence of high startup costs or other obstacles that prohibit new entrants from entering an market or business area easily. Barriers to entry favor existing companies as they safeguard their revenue and profits.

Resource Ownership- One of the most fundamental barriers to entry is ownership of capital, ownership and control of a vital input used in creating a good. Limiting ownership of the data effectively restricts entry into the industry concerned. The petroleum industry is a prime example. For example, if ten firms own and manage all of the world's petroleum reserves, then it is extremely difficult for an eleventh firm to enter the industry.

Patents and Copyrights- A primary efficient input, or even the output itself, in certain cases requires a patent or copyright. A patent is the sole right to use, sell or market an invention for a given period of time. In the United States, patents for a given number of years grant inventors exclusive rights. A copyright is the exclusive right to copying, duplication and selling to written content. Copyrights are also issued in the United States for a given number of years.

Government Restrictions- Government is the source of entry barriers which patents and copyrights create. But those are not the only government-enabled barriers to entry. Government is the entity that sets the rules of the game, after all. It has the ability, literally, to decide who can or can not take part in a given market. Governments often erect barriers to entry through a legal limitation of the number of market participants. Some of the more common examples are public utilities that provide power, natural gas, telecommunications services, and garbage collection to cities.

Start-Up Cost- The previous three entry barriers have a common theme, and it can be expensive to enter an industry. By incurring the exploration costs and acquiring resources, the barrier imposed by resource ownership can be overcome. Undertaking expensive technological research and development can overcome the barrier imposed by patents. Bribing government officials and/or receiving the often costly training required for a license can overcome the barrier imposed by certain government restrictions.

Some barriers to entry are due to government intervention, while others naturally occur within a free market. Industry companies often lobby government to erect new barriers to entry. This is obviously done to preserve the industry 's reputation and to discourage new entrants from bringing inferior goods into the marketplace. Companies typically prefer barriers to entry when they are already safely ensconced in an sector in order to curb competition and demand a greater market share. Other entry barriers occur naturally, and often evolve over time as dominance is established by certain industry players. Input barriers are also categorized as either primary or ancillary.