Barriers to Entry

Introduction

• Definition: Barriers to entry are obstacles that deter a firm from joining a market.
• Examples: Includes licensing, start-up costs, patents, government regulation, and technology hurdles.
• Impact: Support existing companies by preventing new rivals, impacting prices, contributing to monopolies and oligopolies, and providing market power.

Types of Barriers to Entry

1. Agreements

• Distributors: Exclusive arrangements with leading retailers making it tough for other manufacturers.
• Suppliers: Special deals with essential supply chain parts restrict new manufacturers.

2. Intellectual Property

• Patents: Legal prevention of manufacturing by others for a set period.
• Trademarks: Famous brands dominate the market.

3. Switching Costs

• Expensive for consumers to change providers, deterring supplier changes.

4. Tariffs

• Import taxes protecting domestic markets by deterring foreign entrants.

5. Zoning

• Government grants exclusive rights to operate in specific zones.

6. Economies of Scale

• Price advantages make market entry competitive and challenging.

7. Government Restrictions

• Legal orders curbing activities, enforced by authorities.

8. Marketing

• Incumbent companies invest heavily, leaving little room for new entrants.

9. Vertical Integration

• Firms manage multiple production levels, prioritizing their interests.

10. Research and Development (R&D)

• High R&D investment by incumbents creates entry hurdles.

11. Predatory Pricing

• Established companies may sell at a loss to deter new competitors.

12. Multiple Rivals

• Difficult to enter markets with many failing competitors.

13. Technological Innovation

• High tech levels and rapid change deter new market players.

Classification by Michael Porter

• High entry & exit barriers
• High entry & low exit barriers
• Low entry & high exit barriers
• Low entry & exit barriers

Market Characteristics

• High entry barriers: Few players, high profit margins.
• Low entry barriers: Many players, low profit margins.
• High exit barriers: Non-self-regulated, fluctuating profits.
• Low exit barriers: Self-regulated, stable profits.
• Natural monopoly: High entry and exit barriers.
• Perfect competition: Low entry and exit barriers.

Examples

1. Starbucks in Australia

• Cultural differences in coffee consumption.
• Competition from local cafes.

2. Walmart in India

• FDI restrictions and competition from local players.
• Adapted strategy to wholesale instead of direct sales.

3. Tesla in India

• Slow EV market growth.
• Lack of infrastructure and subsidies compared to China.
• Pricing issues and limited consumer base for high-cost EVs.

Conclusion

• Barriers to entry are crucial in shaping market dynamics and competitive landscapes.