The market entry barrier is an obstacle that an enterprise must overcome in order to enter a specific area. Also, this phenomenon represents a source of price control and power, thanks to which an individual company can calmly raise prices without losing its customers. Such barriers to entry into the industry market are due to a number of factors. You can find them in this article.
Definition
Many scientists look at the concept described differently. So, the barrier to entry into the market:
- According to Stigler: “The price of production that a company must pay in order to enter the market; the entities that are already represented on it are not required to pay ”;
- Fisher: “What prevents the entry of the enterprise when the sphere is very profitable and socially significant”;
- Beinu: "Something that allows existing firms to earn above average income without fear of competitors."
Summarizing the statements, it can be noted that the barriers to entry into the market are objective or subjective factors that prevent new companies from conducting profitable activities in the market. These barriers help leading firms raise prices and generate long-term economic benefits. If there are no such barriers, then each industry representative is forced to take into account actual or potential competition.
Industry classification
The previously mentioned Joe Bane (American economist) explored this concept more deeply. The scientist proposed his own classification of industries depending on the height of the barrier to market entry:
- Spheres with free entry. In this case, one can note the complete mobility of resources, the unhindered movement of capital and labor between sectors. The level of competition is close to perfect.
- Market with inefficient barriers. They are characterized by short-term influence. Leading companies will be much cheaper to start up newcomers than to finance the construction of barriers.
- Industries with effective barriers. Stand out thanks to the slow entry of new subjects. Explicit oligopoly and the rise of a dominant company.
- Blocked Entry. Current obstacles in short or long term. There is a natural monopolist in the industry, and the number of representative companies often remains unchanged.
In order to more specifically understand the types of barriers to entry into the market, it is necessary to pay attention to the second and third types of industry. In general, two varieties are distinguished: non-strategic (structural) and strategic (created by the firms themselves).
Administrative barriers
The administrative barrier to entry into the market is the rules and recommendations established by the decision of government bodies, which constitute certain business conditions, taxes and other obligatory payments. Such barriers are formed under the following circumstances:
- regulation and management of access to the resource base and property rights to individual resources (statutory documents, company registration, rental or purchase of premises, leasing or credit, etc.);
- regulation of obtaining permission to carry out the necessary activities (certification, standardization, trademarks, norms and standards);
- current business activities (various kinds of sanctions and fines, additional monitoring and auditing, obtaining benefits, etc.).
Government barriers have a number of consequences, which have an extremely negative effect on the state economy. Firstly, they provoke serious economic losses (rising prices or non-production of gross domestic product). Secondly, officials and private entities working with them in establishing barriers receive systematic distributional benefits.
Institutional barriers
Institutional barriers to entry and exit to the market are one of the most significant barriers to starting a business and its logical continuation. The entry barriers are:
- company licensing system;
- state control of pricing;
- government monitoring of profitability.
As for the obstacles to exit, it should be noted here:
- costs incurred by the owners of the company;
- the difficulties of liquidating a business.
In addition, the inflexible and fairly rigid system for exiting the market acts as a factor of fear of entering the industry. Thus, the number of participants decreases, the monopoly grows and the economy suffers both at the local and global levels.
Socio-economic factors
The socio-economic barrier to entry into the market is primarily characterized by the saturation of the industry with goods and the solvency of consumers. If the market is oversaturated with a product or customers are not able to purchase it, then the question immediately arises, is it worth entering this industry at all?
But it is worth noting that such barriers are characteristic exclusively for countries with developed economies. In order to stimulate competition, developing states must provide a place for the functioning of foreign competitors.
Also, barriers of a socio-economic nature include initial investment. Here we are talking about market development, the cost of construction work, the cost of scientific development or other patents, the search and training of employees, and more.
Strategic barriers
Strategic barriers to entry are created by the companies themselves and their behavior towards competitors or potential rivals. Among them are:
- saving innovations;
- long-term arrangements with suppliers;
- licenses for a certain type of activity and other restrictions;
- increase in marketing and R&D costs.
In addition, barriers are manifested in pricing and marketing policies, which are formed by industry representatives. Companies that have been on the market for quite some time have established trusting relationships with suppliers, customers, competitors and other contact audiences.
Barriers for individuals
As for this species, all the previously described barriers are present here. Special barriers should also be added:
- education;
- licensing;
- quota.
Of particular importance is the first barrier. Unlike the previous ones, the businessman’s skill level and mental abilities help to let only worthy entrepreneurs enter the market and not let ordinary “freeloaders” enter.
