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Barriers to Entry

4 September 2009 - News - Editor

Monopolies, oligopolies and duopolies often come about and are maintained in industrialized countries by means of a situation referred to as “barriers to entry”. These are obstacles facing a company trying to enter an industry, market or trade sector, where well-established companies have by tacit agreement closed ranks making it difficult, if not impossible, for newcomers to enter, and thereby restricting competition.

Advertising is considered to be one of the most effective barriers to entry for newcomers. Established companies generally have more resources than newcomers to spend on advertising, and there is no denying that advertising remains a powerful means of imprinting a brand on the minds of consumers, who even come to view a brand leader as a product for which there is no substitute. Therefore, brand leaders often enjoy strong customer loyalty which is difficult to change. Agreements between producers and retailers, which often include rebates or kick-backs, as well as limited shelf space, can make it difficult for new products to be introduced to the consumer. Retailers may be obliged to stock a product if there is consumer demand, however, consumer demand is generally generated through advertising, which as mentioned above, is often an out-of-reach marketing tool for start up companies.

Large companies may have control of resources required to manufacture certain products, thereby restricting development of competitive products. Also, large manufacturers are generally in a position to negotiate cheaper prices on resources and raw materials based on quantity, which in turn allows them to produce a product at a lower cost than a smaller company would.

With the growing trend of globalization, international suppliers may flood a specific market making it difficult for local companies to gain a foothold. In some instances, such as with public transport and landline telecommunications, monopolies are created by authorities and gaining access to these markets, which may require licenses and government permits, becomes virtually impossible. Patents, trademarks and servicemarks can also be effective barriers to entry.

Known as “predatory pricing”, and illegal in many countries, a dominant firm with sufficient resources may sell at a loss for a period of time to increase market share and block newcomers. Costs which can not be recovered upon exit from a market, known as “sunk costs” are also a barrier to entry for start-up companies with limited resources. An example of this could be money spent in promoting and establishing a brand name, which may be viewed as an asset when in a market, but becomes worthless and cannot be sold when exiting a market.

 


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