Barriers to Entry: Understanding What Limits Competition (2024)

What Are Barriers to Entry?

Barriers to entry is an economics and business term describing factors that can prevent or impede newcomers into a market or industry sector, and so limit competition. These can include high start-up costs, regulatory hurdles, or other obstacles that prevent new competitors from easily entering a business sector. Barriers to entry benefit existing firms because they protect their market share and ability to generate revenues and profits.

Common barriers to entry include special tax benefits to existing firms, patent protections, strong brand identity, customer loyalty, and high customer switching costs. Other barriers include the need for new companies to obtain licenses or regulatory clearance before operation.

Key Takeaways

  • Barriers to entry describe the high start-up costs or other obstacles that prevent new competitors from easily entering an industry or area of business.
  • Barriers to entry benefit incumbent firms because they protect their revenues and profits and prevent others from stealing market share.
  • Barriers to entry may be caused naturally, by government intervention, or through pressure from existing firms.
  • Each industry has its own specific set of barriers to entry that startups must contend with.
  • Barriers to entry may be financial (high cost to enter a market), regulatory (laws restricting trade), or operational (trying to attract loyal customers or inaccessibility of trade channels).


Barriers to Entry

Understanding Barriers to Entry

Some barriers to entry exist because of government intervention, while others occur naturally within a free market. Often, companies lobby the government to erect new barriers to entry. Ostensibly, this is done to protect the integrity of the industry and prevent new entrants from introducing inferior products into the market.

Generally, firms favor barriers to entry in order to limit competition and claim a larger market share when they are already comfortably ensconced in an industry. Other barriers to entry occur naturally, often evolving over time as certain industry players establish dominance.Barriers to entry are often classified as primary or ancillary.

A primary barrier to entry presents as a barrier alone (e.g., steep startup costs).An ancillary barrier is not a barrier in and of itself. Rather, combined with other barriers, it weakens the potential firm's ability to enter the industry.In other words, it reinforces other barriers.

Barriers to entry may be natural (high startup costs to drill a new oil well), created by governments (licensing fees or patents stand in the way), or by other firms (monopolists can buy or compete away startups).

Government Barriers to Entry

Industries heavily regulated by the government are usually the most difficult to penetrate. Examples include commercial airlines, defense contractors, and cable companies. The government creates formidable barriers to entry for varying reasons. In the case of commercial airlines, not only are regulations stout, but the government limits new entrants to limit air traffic and simplifies monitoring. Cable companies are heavily regulated and limited because their infrastructure requires extensive public land use.

Sometimes the government imposes barriers to entry not by necessity but because of lobbying pressure from existing firms. For example, one state requires government licensing to become a florist and four states require government licensing to become an interior designer. Critics assert that regulations on such industries are needless, accomplishing nothing but limiting competition and stifling entrepreneurship.

Natural Barriers to Entry

Barriers to entry can also form naturally as the dynamics of an industry take shape. Brand identity and customer loyalty serve as barriers to entry for potential entrants. Certain brands, such as Kleenex and Jell-O, have identities so strong that their brand names are synonymous with the types of products they manufacture.

High consumer switching costs are barriers to entry as new entrants face difficulty enticing prospective customers to pay the additional money required to make a change/switch.

Barrier to entry may also be referred to as barrier to competition, entry barrier, or market entry barrier.

Industry-Specific Barriers to Entry

Industry sectors also have their own barriers to entry that stem from the nature of the business as well as the position of powerful incumbents.

Pharmaceutical Industry

Before any company can make and market even a generic pharmaceutical drug in the United States, it must be granted a special authorization by the FDA. The FDA cites that even the most important drugs for general public health may take up to six months to approve. Although the standard review timeline is around 10 months, more complex drugs or applications may be required to enter this review cycles multiple times due to revisions.

Moreover, just 18% of applications are approved in the first cycle. Each application is incredibly political and even more expensive. In the meantime, established pharmaceutical companies can replicate the product awaiting review and then file a special 180-day market exclusivity patent, which essentially steals the product and creates a temporary monopoly.

It may take billions of dollars to bring a drug to market. Equally as important, it can take up to 10 years for a drug to be approved for a prescription. Even if a startup company had the capital on hand to develop and test the drug according to FDA rules, it still might not receive revenue for 10 years. Last, ultimate success is far from guaranteed. From 2011 to 2020, the likelihood of approval for development candidates for just Phase I was 7.9%.

Electronics Industry

Consumer electronics with mass popularity are more susceptible toeconomies of scale and scope as barriers. Economies of scale mean that an established company can easily produce and distribute a few more units of existing products cheaply because overhead costs, such as management and real estate, are spread over a large number of units. A small firm attempting to produce these same few units must divide overhead costs by its relatively small number of units, making each unit very costly to produce.

Established electronics companies, such as Apple (AAPL), may strategically build in switching costs to retain customers. These strategies may include contracts that are costly and complicated to terminate or software and data storage that cannot be transferred to new electronic devices. This is prevalent in the smartphone industry, whereinconsumers may pay termination fees and face the cost of reacquiring applications when they consider switching phone service providers.

Oil and Gas Industry

Thebarriers to entryin the oil and gas sector are extremely strong and include high resource ownership, high startup costs,patentsand copyrights in association with proprietary technology, government, and environmental regulations, and high fixed operating costs. High startup costs mean that very few companies even attempt to enter the sector. This lowers potential competition from the start. In addition, proprietary technology forces even those with high startup capital to face an immediate operating disadvantage upon entering the sector.

High fixed operating costs make companies with startup capital wary of entering the sector. Local and foreign governments also force companies within the industry to closely comply with environmental regulations. These regulations often require capital to comply, forcing smaller companies out of the sector.

Financial Services Industry

It is generally very expensive to establish a new financial services company. High fixed costs and large sunk costs in the production ofwholesale financial services make it difficult for startups to compete with large firms that have scale efficiencies. Regulatory barriers exist between commercial banks, investment banks, and other institutions and, in many cases, the costs of compliance and threat of litigation are sufficient to deter new products or firms from entering the market.

Compliance and licensure costsare disproportionately damaging to smaller firms. A large-cap financial services provider does not have to allocate as large of a percentage of its resources to ensure it does not run into trouble with the Securities and Exchange Commission (SEC), Truth in Lending Act (TILA), Fair Debt Collection Practices Act (FDCPA), Consumer Financial Protection Bureau (CFPB), Federal Deposit Insurance Corporation (FDIC), or a host of other agencies and laws.

How to Overcome Barriers to Entry

Companies deploy a number of strategies to avoid or overcome barriers to entry. Here are some common barriers and potential solutions to address them.

Trade and Economic Barriers

If governments are employing trade sanctions, it may be more difficult to import or export goods in relation to that country. Companies may seek different markets to work with or seek which products are specifically excluded from trade sanctions. If all else fails, a company may simply delay the timing of transacting with the country with the sanction as many government sanctions are temporary.

Tariffs and Tax Barriers

Companies may pre-emptively decide they want to burden the consumer with additional barrier charges such as import tariffs or taxes. Companies may also seek ways to avoid taxes such as partnering with local organizations to manufacture goods or develop value-added activities in the local market so the imported goods are assessed at a lower value (and assessed lower fees).

Information Barriers

A company seeking to join or create a brand new market may simply not have enough information needed to feel it may be successful. For these types of barriers, it may be best for the company to develop a minimum viable product for market research. This test product may be used to elicit consumer feedback as well as shape financial planning expectations.

A company may also consider acquiring an existing company within the market it seeks to join. Not only will this company have already overcome some if not all aspects of the barriers to entry, the company may have knowledge and information useful to the long-term success of the company.

Market Dominance Barriers

In some cases, the market leader position is so advanced, it'd nearly impossible they'll be caught in the short-term. For these barriers, companies may consider using a disruptive pricing model and even incurring a short-term loss to steal long-term customers. A company may also set difference objectives such as "be the lowest cost producer".

Cost Barriers

Though many costs likely can't be overcome, a company may consider using open-source software instead of custom, proprietary software to cut costs. The company may seek short-term leases instead of capital investments for equipment to gauge financial success in the near term. The company may also choose to only manufacture on-demand or on order to avoid over-committing resources that could have been used elsewhere.

What Are Some Barriers to Entry?

The most obvious barriers to entry are high start-up costs and regulatory hurdles which include the need for new companies to obtain licenses or regulatory clearance before operation. Also, industries heavily regulated by the government are usually the most difficult to penetrate. Other forms of barrier to entry that prevent new competitors from easily entering a business sector include special tax benefits to existing firms, patent protections, strong brand identity, customer loyalty, and high customer switching costs.

Why Would a Government Create a Barrier to Entry?

Governments create barriers to entry for varying reasons. In some cases, such as consumer protection laws, these barriers are intended to protect public safety but have the unintended effect of favoring incumbent businesses. In other cases, such as broadcasting licenses or commercial airlines, the barriers are due to the inherent scarcity of the public resources needed by these industries. In some cases, the government may impose barriers to entry explicitly to protect favored industries.

What Are Natural Barriers to Entry?

Barriers to entry can also form naturally as the dynamics of an industry take shape. Brand identity and customer loyalty serve as barriers to entry for potential entrants. Certain brands, such as Kleenex and Jell-O, have identities so strong that their brand names are synonymous with the types of products they manufacture. High consumer switching costs are barriers to entry as new entrants face difficulty enticing prospective customers to pay the additional money required to make a change/switch.

Which Industries Have High Barriers to Entry?

Industries requiring heavy regulation or high upfront capital often have the highest barriers to entry. Telecommunications, transport (i.e. car or airplane), casinos, parcel delivery services, pharmaceutical, electronics, oil and gas, and financial services often all require substantial initial investments. Each of those industries is also heavily regulated or requires substantial oversight from governing bodies.

The Bottom Line

There are many aspects of many industries that prevent companies from entering into a market. These barriers to entry may be set by government policy, created due to high financial cost, or occur naturally due to the industry itself. For companies already within the industry, barriers to entry protects against competition easily stealing market share. For companies seeking entry, it'll be a larger hurdle trying to overcome the hurdles preventing easy access into an industry.

Barriers to Entry: Understanding What Limits Competition (2024)


What are the barriers to entering a market that limit competition? ›

Common barriers to entry include special tax benefits to existing firms, patent protections, strong brand identity, customer loyalty, and high customer switching costs.

How do barriers to entry affect the extent of competition? ›

Barriers to entry are factors that prevent or make it difficult for new firms to enter a market. The existence of barriers to entry make the market less contestable and less competitive. The greater the barriers to entry which exist, the less competitive the market will be.

What are the 3 barriers to entry into a market? ›

Common Barriers to Market Entry
  • Advertising and Marketing. ...
  • Capital Costs. ...
  • Monopolization of Resources. ...
  • Cost Advantages (excluding economies of scale) ...
  • Customer Loyalty. ...
  • Distribution. ...
  • Economies of Scale. ...
  • Regulatory Barriers.

How will competition respond to your market entry? ›

The entry of a new competitor in a market tends to reduce the market prices. When there are more companies competing for the same market share, customers choose those with lower pricing, and the general price level goes down.

What is perfect competition examples? ›

What Is an Example of Perfect Competition? Consider a farmers market where each vendor sells the same type of jam. There is little differentiation between each of their products, as they use the same recipe, and they each sell them at an equal price.

What is barriers to entry give example and explain? ›

Barriers to entry are obstacles that make it difficult to enter a given market. These hindrances may include government regulation and patents, technology challenges, start-up costs, or education and licensing requirements.

What is a barrier to entry give some examples? ›

Barriers to entry form an obstacle to businesses when entering a market. This can come in the form of high start-up costs, strongly branded competitors, or high import duties. For instance, car manufacturers require high start-up costs and face competitors that have high brand trust and loyalty.

What is an example of a barrier to entry? ›

Tap water – Economies of Scale. This means as firms produce more their average costs fall. Therefore, it is difficult for new, small firms to enter the market and be competitive.

What are the barriers to competitive advantage? ›

These are (1) price leadership, (2) low cost differentiation, (3) imitation and (4) differentiation. Barriers to competitive advantage are conceptionalised in terms of "strategic coherence" model, which has three aspects.

How can barriers to entry be overcome? ›

Here are some suggestions:
  1. Start with a minimum viable product and then iterate - responding to consumer feedback.
  2. Use a disruptive pricing model / have different objectives.
  3. Produce outstanding content/products – this makes a product less price sensitive.
Mar 21, 2021

Do competitive markets have barriers to entry? ›

Before a firm can compete in a market, it has to be able to enter it. Many markets have at least some impediments that make it more difficult for a firm to enter a market. A debate over how to define the term “barriers to entry” began decades ago, however, and it has yet to be won.

What are the 4 types of barriers? ›

Following are some of the barriers to effective communication:
  • Semantic barriers.
  • Psychological barriers.
  • Organisational barriers.
  • Cultural barriers.
  • Physical barriers.
  • Physiological barriers.

What are the most important barriers to entry? ›

There are seven sources of barriers to entry:
  • Economies of scale. ...
  • Product differentiation. ...
  • Capital requirements. ...
  • Switching costs. ...
  • Access to distribution channels. ...
  • Cost disadvantages independent of scale. ...
  • Government policy. ...
  • Read next: Industry competition and threat of substitutes: Porter's five forces.

What are the 5 basic types of trade barriers? ›

The main types of trade barriers used by countries seeking a protectionist policy or as a form of retaliatory trade barriers are subsidies, standardization, tariffs, quotas, and licenses.

How do you overcome competition? ›

How to Handle Competition in Business: 7 Tips to Beat Competition
  1. Know Your Customers.
  2. Understand the Competition.
  3. Highlight Your Difference.
  4. Clarify Your Message.
  5. Explore Strategic Partnership Opportunities.
  6. Keep Innovating.
  7. Look After Your Team.

How do you stand out from the competition answers? ›

7 tips: This is How You Stand Out Amongst Your Competitors
  1. Meet your target market's challenges with solutions.
  2. Find and use your USP.
  3. Stand out visually.
  4. Highlight good customer reviews.
  5. Provide the best customer service.
Jun 15, 2019

How do you respond to a competitive threat? ›

Three main options are available for responding to a disruptive innovation: ignore the disruption, engage in a counterattack using different goods and/or services, or directly match the competitor's move.

What are 5 examples of competition? ›

Types of Competition
  • Interspecific Competition. Interspecific competition is the one that occurs between different species that use the same resource or a group of resources. ...
  • Intraspecific Competition. ...
  • Interference Competition. ...
  • Exploitative Competition. ...
  • Apparent Competition.
Sep 15, 2022

What is perfect competition Short answer? ›

Perfect competition is considered to be that condition where every company or firm in the market is selling identical products and the market share of the company has no impact on the price of the product.

What is meant by perfect competition answer? ›

Definition. Perfect competition is a unique form of the marketplace that allows multiple companies to sell the same product or service. Many consumers are looking to purchase those products. None of these firms can set a price for the product or service they are selling without losing business to other competitors.

What are the most common barriers? ›

Here are seven of the most common communication barriers that get in the way of good relationships.
  • Physical Barriers. ...
  • Perceptual Barriers. ...
  • Emotional Barriers. ...
  • Cultural Barriers. ...
  • Language Barriers. ...
  • Gender Barriers. ...
  • Interpersonal Barriers. ...
  • Break Through The Barriers.

What are three examples of barriers? ›

These include distance, background noise, poor or malfunctioning equipment, bad hearing, poor eyesight, speech impediments.

What are the types of barriers? ›

Physical Barriers to Communication

They include barriers like noise, closed doors, faulty equipment used for communication, closed cabins, etc. Sometimes, in a large office, the physical separation between various employees combined with faulty equipment may result in severe barriers to effective communication.

Which of the following best describe barrier to entry? ›

Barriers to entry are the obstacles or hindrances that make it difficult for new companies to enter a given market. These may include technology challenges, government regulations, patents, start-up costs, or education and licensing requirements.

How does the lack of competition affect prices? ›

In an economy without adequate competition, prices and corporate profits rise, while workers' wages decrease. This means large corporations and their shareholders gain wealth, while consumers and workers pay the cost.

What is an example of risk of entry by potential competitors? ›

A clothing designer selling their merchandise on an online platform may face a high threat of new entrants from other small businesses who may enter the market and sell similar designs at a comparable price.

What are the different methods for determining competition? ›

How to Identify Direct Competitors
  • Market Research. Take a look at the market for your product and evaluate which other companies are selling a product that would compete with yours. ...
  • Solicit Customer Feedback. ...
  • Check Online Communities on Social Media or Community Forums.
Feb 22, 2018

What are the main factors of competition? ›

From a microeconomics perspective, competition can be influenced by five basic factors: product features, the number of sellers, barriers to entry, information availability, and location.

What is the importance of competitive strategy? ›

Having a competitive strategy is most important when a company has a competitive marketplace and several similar products are available for consumers. This strategy helps you create a defensive position in your industry, along with generating a superior return on investment.

What are the key factors for competitive success and why? ›

With this in mind, these seven competitive factors should help you focus your competitive analysis.
  • Understand Core Products and Services. ...
  • Long- and Short-Term Market Trends. ...
  • Focus on the Right Competitors. ...
  • Focus on the Purpose of Your Competitive Analysis. ...
  • Be Flexible As Data Shows Popular Trends.
Nov 29, 2017

How do you address and overcome barriers? ›

The following tips will help you in implementing change better.
  1. Strategize with the ADKAR Model. ...
  2. Create a Communication Plan. ...
  3. Involve Your Employees. ...
  4. Prioritize Well. ...
  5. Highlight the Disadvantages of Legacy Processes. ...
  6. Focus on Training & Support.
Jun 21, 2021

What are your top 3 barriers write specific ways on how you can overcome these barriers physical activity? ›

Here are some of the more common barriers and solutions for overcoming them:
  • Barrier: Lack of time. ...
  • Barrier: Friends and family don't share your interest in physical activity. ...
  • Barrier: Lack of motivation and/or energy. ...
  • Barrier: Lack of resources/equipment. ...
  • Barrier: Family caregiving obligations.
Apr 18, 2018

What are the barriers to entry into the perfectly competitive market quizlet? ›

A perfectly competitive industry has no barriers to entry, and features many firms selling identical products.

Is perfect competition low barriers to entry? ›

In perfect competition, identical products are sold, prices are set by supply and demand, market share is spread to all firms, buyers have complete information about products and prices, and there are low or no barriers to entry or exit.

What are the 4 main communication barriers? ›

Let's explore four categories of barriers to effective communication in the workplace (language barriers, inclusion barriers, cultural barriers, and environmental barriers).

What are barriers quizlet? ›

Something that obstructs or blocks.

What are the two 2 main barriers of trade? ›

The most common barrier to trade is a tariff–a tax on imports. Tariffs raise the price of imported goods relative to domestic goods (good produced at home). Another common barrier to trade is a government subsidy to a particular domestic industry.

What are the 4 trade barriers quizlet? ›

There are 3 major types: Tariffs, Quotas, Embargoes (they "hinder" global trade).

What is trade barrier Short answer? ›

A trade barrier is a kind of measure which are introduced by the government or public authorities in order to make imported goods and services are less competitive than locally produced goods and services.

What are the 4 market entry barriers? ›

There are 4 main types of barriers to entry – legal (patents/licenses), technical (high start-up costs/monopoly/technical knowledge), strategic (predatory pricing/first mover), and brand loyalty.

What are the 5 market barriers? ›

The major categories that translate into barriers are cost, capital, know-how, location, and state power. These factors are complexly intertwined.

What is a competition barrier? ›

Definition. Barriers to competition encompass the economic, legal, technical, psychological, or other factors that reduce competitive rivalry below the level that would otherwise occur naturally. Barriers include branding, advertising, patents, entry restrictions, tariffs, and quotas.

What are the 4 barriers to entry in a monopoly? ›

These barriers include: economies of scale that lead to natural monopoly; control of a physical resource; legal restrictions on competition; patent, trademark and copyright protection; and practices to intimidate the competition like predatory pricing.

What is an example of barrier entry? ›

Barriers to entry are the obstacles or hindrances that make it difficult for new companies to enter a given market. These may include technology challenges, government regulations, patents, start-up costs, or education and licensing requirements.

How many types of barriers are there? ›

Basically three types of barriers are found these are, external barriers, organizational barriers and personal barriers. The external barriers are classified into two categories—Semantic barriers and Psychological barriers.

What are the 4 types of competition? ›

There are four types of competition in a free market system: perfect competition, monopolistic competition, oligopoly, and monopoly. Under monopolistic competition, many sellers offer differentiated products—products that differ slightly but serve similar purposes.

Is competitive advantage a barrier to entry? ›

Barriers to Entry are obstacles to starting the business, and Competitive Advantages are obstacles to beating rival companies.

What are the three main sources of barriers to entry for monopolies? ›

These profits should attract vigorous competition as described in Perfect Competition, and yet, because of one particular characteristic of monopoly, they do not. Barriers to entry are the legal, technological, or market forces that discourage or prevent potential competitors from entering a market.

How does a monopoly restrict competition? ›

A monopoly limits available substitutes for its product and creates barriers for competitors to enter the marketplace. Monopolies can lead to unfair consumer practices. Some monopolies such as those in the utility sector are government regulated.

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