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Barriers to Entry

 

There are a number of different factors that will prevent a firm entering any particular industry.

 

Capital costs

Buying a shop is relatively cheap, therefore entering most forms of retailing is easy. Buying an oil rig or a car production plant requires a substantial capital investment, entry costs into such industries can only be met by large companies. These capital costs, which vary from industry to industry, are an important barrier to entry.

 

Sunk costs

Sunk costs are those that aren't recoverable, e.g., the difference between the purchase price and the resale price of capital equipment and the costs of advertising. High sunk costs will act as a barrier to entry as the cost of failure is so great. Conversely low sunk costs will encourage forms to enter an industry, as they will have little to lose.

 

Scale economies

In some industries the minimum efficient scale (MES) is very large and it takes many years to reach that level of output. Existing firms who have the lower costs would be able to win any price war against a new entrant.

 

Patents

The government assigns patents to the owner of a particular idea or invention for 17-20 years, they legally prevent other firms producing or using something that is patented, e.g., catseyes, Dyson vacuum cleaners.

 

Government licences

Prevent other firms from providing a good or service, e.g., commercial television and radio, the national lottery, delivery of letters by Royal Mail and the production of nuclear energy.

 

Marketing barriers

Marketing can lead to barriers to entry, as huge spending by firms leads to consumer loyalty. New entrants have to at least match this level of advertising if they wish to persuade consumers to buy their product, e.g., soap powders are produced cheaply using a low level of technology, therefore existing firms advertise heavily so that any new entrant would have to spend an estimated 10 million to launch their product (a very high sunk cost).

 

International trade restrictions

Tariffs and quotas are deemed to be barriers to entry as they prevent firms from competing in a particular market.

 

Restrictive practices

Restrictive practices are illegal and can occur in a number of ways:

        manufacturers may refuse to supply a retailer who stocks a competitor's product, e.g., Brewers

  • a firm may refuse to sell one good unless the buyer purchases a whole range of goods, e.g., Levi's won't just supply 501s.
  • firms may lower the price so much that competitors are driven out of the market, e.g., British Airways are being accused of doing this with their budget airline Go.

 

 

E-mail Steve Margetts