Barriers to Entry

… a core term used in Economic Analysis and Atlas102

Definition

The Economist defines barriers to entry as how firms keep out competition – an important source of incumbent advantage.

The Economist goes on to say:

“There are four main sorts of barriers.

  • A firm may own a crucial resource, such as an oil well, or it may have an exclusive operating licence, for instance, to broadcast on a particular radio wavelength.
  • A big firm with economies of scale may have a significant competitive advantage because it can produce a large output at lower costs than can a smaller potential rival.
  • An incumbent firm may make it hard for a would-be entrant by incurring huge sunk costs, spending lots of money on things such as advertising, which any rival must match to compete effectively but which have no value if the attempt to compete should fail.
  • Powerful firms can discourage entry by raising exit costs, for example, by making it an industry norm to hire workers on long-term contracts, which make firing an expensive process.”
Atlas topic, subject, and course

Monopoly and Price Discrimination (core topic) in Economic Analysis and Atlas102 Economic Analysis.

Source

The Economist, Barriers to entry (or exit), Economics A-Z, at http://www.economist.com/economics-a-to-z/b#node-21529927, accessed 7 May 2016.

Page created by: Ian Clark, last modified 7 May 2016.