Barrier to Entry

A barrier to entry is any factor that restricts competition within a market. These barriers raise the costs and challenges faced by new entrants, thereby protecting the profitability of incumbent firms. According to Bain, barriers to entry are long-term structural conditions that allow established companies to maintain prices above average costs without triggering entry by new competitors. Such barriers create an asymmetry between incumbents and potential entrants. Barriers can be economic, technological, institutional, or strategic in nature.

• Economic barrier. Economic barriers increase both the costs and risks for firms attempting to enter the market. As Stigler notes, these barriers effectively impose additional production costs on new entrants - costs that existing firms do not bear. Incumbent firms typically benefit from significant economies of scale. For example, in markets characterized by high fixed production costs and dominated by a few large players (oligopoly) or a single dominant firm (monopoly), the entry of new competitors is strongly discouraged.
• Technological barrier. Technological barriers arise when new entrants are unable to access the necessary technology to compete effectively. This can result from patent protections or proprietary know-how held by incumbent firms. Existing firms often enjoy superior, more efficient technologies that lower their production costs. New entrants, unable to match these efficiencies, would face significantly higher costs, making entry economically unfeasible.
• Institutional barrier. Institutional barriers are created through government regulation or legal frameworks that restrict or prevent market entry by new firms. These can reflect protectionist policies or regulatory decisions aimed at limiting competition in certain sectors - for example, in highly regulated industries such as energy.
• Strategic barrier. Strategic barriers result from deliberate actions taken by incumbent firms to deter new entrants. A classic example is limit pricing, where a dominant firm sets prices low enough to make market entry unattractive or unprofitable for potential competitors.
• Structural barrier. Structural barriers arise from inherent characteristics of the market itself - factors that cannot be altered through the behavior or strategic decisions of individual firms. These might include natural monopolies, high capital requirements, or other exogenous conditions that inherently limit entry.

Loss of social welfare. The presence of barriers to entry prevents markets from achieving a state of perfect competition and optimal resource allocation. For this reason, economists such as Von Weizsäcker view entry barriers as detrimental to overall social welfare.