We’ll explore the business definition of barriers to entry and its meaning in this article. We’ll also touch on several real-world examples.
The Encyclopædia Britannica defines barriers to entry as obstacles that make it difficult for a firm to enter a given market. Barriers to entry can take on a variety of forms and shapes. In addition, many legal entity types (governments, business associations, etc.) create barriers to entry.
Now that we get the basic concept behind barriers to entry, let’s look at several real-world examples.
Governments at the federal and state level frequently impose barriers to entry. Even small cities and counties can impose them. Patents are one example of a legal barrier to entry. By assigning only one party the exclusive right to produce a certain product, competitors are denied the right to use that product. After some time, the patent often expires, allowing the patent holder’s rivals to compete.
Licenses and permits are another example of legal barriers to entry. Virtually all businesses have to invest time and money to acquire licenses and permits. Common examples include liquor and food handling licenses for businesses and professional licenses for attorneys, doctors, and accountants.
Businesses that plan to export or import products will certainly encounter trade regulations. Common examples include quotas and tariffs. Quotas are arbitrary limits imposed by the government on the number of goods that can be imported or exported. Tariffs are taxes or fees that governments impose on foreign products.
Not all barriers to entry come from governments. Many are “soft” factors that occur naturally in a market or industry. For instance, the reputation and brand loyalty of a mainstay in an industry can act as a trade barrier to new competitors. Faced with an unknown company, many customers will choose the brand they’re most familiar with.
Barriers to entry can affect an industry (and the companies within that industry) in unexpected ways. They generally benefit current companies in the industry over newcomers. Yet they can also cause disadvantages for society as a whole.
Barriers to entry benefit established companies in an industry by limiting their competition. They also ensure that innovative companies enjoy the rewards of their creativity. And trade barriers often act to protect local companies from being undercut by foreign companies with cheaper labor or material costs.
If barriers to entry are too high, they can prevent new companies from improving a sector of the economy. They can also create monopolies, allowing one company to corner the market and charge exorbitant prices. And trade barriers can harm consumers by raising the cost of foreign products that would otherwise be affordable.
Barriers to entry are any factors that work to prevent a company from entering a new industry or sector.
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Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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