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Barriers to entry


Features of technological or econornic conditions of a market which raise the costs of firms wanting to enter the market above those offirms already in the market or otherwise make new entry difficult. For example, a high degree of product differention creates a barrier to entry since a new entrant might have to spend a very great deal on advertising and sales promotion in order to overcome the brand loyalty of consumers to existing brands. Similarly the existence of marked economies of scale in the industry may require the new firm to enter at a very large scale of output if it is not to suffer a cost disadvantage; moreover, the need to capture a large part of the market may cause a fall in price and profits and make the entry un­profitable. We would expect the nature of barriers to entry of ari industry to be an important determinant of the profits earned in the industry. Hence, with very low barriers we would expect profits in the long run to approach normal profits. On the other hand high entry barriers will strengthen monopoly power and may permit high profits to be made. Other important sources of entry barriers are patents, exclusive dealing contracts with suppliers or distributors, and vertical integration. Entry barriers will be less effective when there is either rapid expansion in demand or techno­logical change.

Reference: The Penguin Dictionary of Economics, 3rd edt.