What are Barriers to Entry?
Barriers to Entry deter new entrants from entering a market and protect the profits of existing incumbents.
The existence of barriers to entry within a particular industry causes the market to become less attractive and reduces competition.
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How Do Barriers to Entry Work in Economics?
In economics, the term “barriers to entry” describes the factors that prevent outside parties from entering a given market.
Generally speaking, the higher the barriers to entry, the more limited the competition within an industry would be – all else being equal.
From the perspective of industry incumbents, the barriers are obstacles that protect their existing market share from new entrants, resulting in fewer competitors and thus higher prices for consumers.
In theory, long-term profits can be sustained only with barriers to entry in place to protect existing incumbents.
On the other side, new entrants view those barriers as the obstacles needed to be successfully overcome in order to have a chance at obtaining market share.
High vs. Low Barriers to Entry: What is the Difference?
In order to disrupt an industry with high barriers in place, potential new entrants – most often startups or companies attempting to expand their reach into different end markets – are taking on more risk.
- High Barriers to Entry → High Difficulty in Market Entrance (Low Competition)
- Low Barriers to Entry → Low Difficulty in Market Entrance (High Competition)
Markets with low barriers to entry are thus prone to more disruption and viewed as attractive industries to startups (and existing companies are placed in a vulnerable position).