Barriers to Entry

Statement

Barriers to entry are the various costs and obstacles that prevent new competitors from entering an industry or area of business.

Notes

Barriers to entry are the single feature that most shapes the market structure an industry takes: the higher the barriers, the lower the level of competition, because would-be rivals find it difficult to enter and existing firms can therefore retain supernormal profit in the long run. Common barriers include large internal economies of scale (which force a new entrant to produce at high output merely to compete on cost), control of key inputs, legal barriers such as patents and copyrights, and entrenched brand loyalty. Firms can also raise barriers deliberately — for instance through limit pricing.