Chapter 9: Problem 8

What is a barrier to entry? Give some examples.

Short Answer

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A barrier to entry is an obstacle that makes it difficult for a new company to enter and compete in an existing market. Examples of barriers to entry include high start-up costs, strict government regulations, brand loyalty and reputation, and economies of scale. For instance, the airline industry has high entry barriers due to its expensive requirements, the pharmaceutical industry faces strict regulations, and companies like Coca-Cola and Pepsi benefit from brand loyalty, making it difficult for competitors to emerge in these markets.

Step by step solution

Definition of Barrier to Entry

A barrier to entry is an obstacle that makes it difficult for a new company to enter and compete in an existing market. These barriers can be in the form of high start-up costs, strict regulations, or strong competition from well-established firms.

Example 1: High Start-up Costs

One example of a barrier to entry is the high start-up cost associated with certain industries. For instance, the airline industry has high entry barriers due to the costs of purchasing or leasing airplanes, hiring and training pilots and staff, and obtaining necessary permits and licenses. This makes it challenging for new airlines to enter the market and compete with existing companies.

Example 2: Government Regulations

Another example of a barrier to entry is strict government regulations. Some markets, such as the pharmaceutical industry, are subject to rigorous regulations and requirements (e.g., drug approval processes, safety standards, and patent laws), making it difficult and costly for new firms to enter. These regulations serve to protect public health, but they also create barriers to entry for new companies wanting to compete in the market.

Example 3: Brand Loyalty and Reputation

Brand loyalty and reputation can also serve as barriers to entry. For example, in the soft drink industry, major players like Coca-Cola and Pepsi have strong brand loyalty among consumers, making it difficult for new entrants to gain market share. The reputation and image associated with these established brands can be a major obstacle for new companies attempting to break into the market.

Example 4: Economies of Scale

Economies of scale are another barrier to entry that some industries face. As production increases, companies can achieve economies of scale, meaning their average costs per unit decrease. This can give larger, well-established firms a competitive advantage over new entrants, who may struggle to reach the same level of production efficiency. For instance, in the automobile industry, established manufacturers like General Motors and Toyota can produce vehicles at lower costs due to their scale, making it difficult for new companies to enter and compete in this market.