Barriers To Entry

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What are 'Barriers To Entry'

Barriers to entry are the existence of high startup costs or other obstacles that prevent new competitors from easily entering an industry or area of business. Barriers to entry benefit existing firms already operating in an industry because they protect an established company's revenues and profits from being whittled away by new competitors. Common barriers to entry include special tax benefits to existing firms, patents, strong brand identity or customer loyalty, and high customer switching costs.

BREAKING DOWN 'Barriers To Entry'

Some barriers to entry exist as a result of government intervention, while others occur naturally within the business world. Often, existing firms within an industry lobby for the government to erect new barriers to entry. Ostensibly, this is done to protect the integrity of the industry and prevent fly-by-night operations from setting up shop and hawking inferior products and services. In reality, firms favor barriers to entry when already comfortably ensconced in an industry to limit competition and claim a larger share of the industry's revenue. Other barriers to entry occur naturally, often evolving over time as certain industry players establish dominance.

Government Barriers to Entry

Industries heavily regulated by the government are usually the most difficult to break into; examples include commercial airlines, defense contractors and cable companies. The government erects formidable barriers to entry in such industries for varying reasons. In the case of commercial airlines, not only are regulations stout, but the government limits new entrants in an effort to limit air traffic and make monitoring easier. Cable companies are heavily regulated and limited in number because their infrastructure requires extensive public land use.

Sometimes the government imposes barriers to entry not by necessity but as a result of lobbying pressure from existing firms. For example, in many states, government licensing is required to become a florist or an interior decorator. Critics assert that regulations on such industries are needless, accomplishing nothing but limiting competition and stifling entrepreneurship.

Natural Barriers to Entry

Barriers to entry can also form naturally as the dynamics of an industry take shape. Brand identity and customer loyalty serve as barriers to entry for outsiders. Certain brands, such as Kleenex and Jell-O, have identities so strong their brand names are synonymous in the common lexicon with the products themselves.

In industries where customers incur high costs switching from one brand to another, this becomes a de facto barrier to entry for new firms, as they face difficulty enticing prospective customers to pay the money required to make a change.