1. Structural barriers
Structural barriers are external factors that make it difficult for a new entrant to compete in a market. These barriers can include:
- Economies of scale: This means that the existing firms in the industry have a cost advantage over potential entrants because of their larger size and production scale.
- Access to resources: New entrants may have limited or expensive access to raw materials, technology, and capital, putting them at a disadvantage.
- Government regulations: Certain industries may be heavily regulated, requiring new entrants to obtain licenses, permits, or certifications, creating hurdles and delays.
- Geographic location: Some industries may be geographically concentrated, making it challenging for new entrants to establish a presence.
- Product differentiation: Existing firms may have a strong brand reputation or product loyalty which establishes a high level of customer preference for their products or services.
2. Strategic barriers
Strategic barriers are the actions taken by existing firms in an industry to prevent or deter potential entrants. These barriers can include:
- Predatory pricing: Existing firms may lower prices to levels that make it unsustainable for new entrants to enter the market.
- Exclusive contracts: Existing firms may lock suppliers and customers into long-term contracts that prevent them from doing business with new entrants.
- Cost advantages: Existing firms may have access to lower-cost inputs, technology, or infrastructure that give them a substantial competitive advantage.
- Collusion: Firms in an industry may collude to create higher barriers to entry by collectively influencing the market dynamics.
Barriers to entry can vary significantly across different industries. Some industries may have low barriers, such as the fast fashion industry or the restaurant business, where new entrants can easily start up and compete. In contrast, other industries may have high barriers, such as the pharmaceutical or aerospace industries, where substantial investments, regulatory approvals, and technical expertise are required.
