A market entry barrier is a barrier that an enterprise must overcome in order to enter a particular area. It also represents a source of price control and power, thanks to which an individual firm can safely raise prices without losing its customers. Such barriers to entry into the industry market are due to a number of factors. They can be found in this article.
Definition
Many scientists look at the described concept in different ways. Thus, the entry barrier to the market:
- According to Stigler: “The cost of production that a company must pay to enter the market; entities that are already represented on it are not required to pay”;
- Fischer: "What prevents the entry of the enterprise, when the area is very profitable and socially significant";
- Bain: "Something that allows established firms to generate above-average returns without fear of competition."
Summarizing the statements, it can be noted that market entry barriers are objective or subjective factors that prevent new companies from conducting profitable activities in the market. Barriers like these help leading firms raise prices and reap economic benefits in the long run. If there are no such barriers, then each industry representative is forced to take into account actual or potential competition.
Classification of industries
The previously mentioned Joe Bain (American economist) explored this concept in more depth. The scientist proposed his own classification of industries depending on the height of the entry barrier to the market:
- Spheres with free entry. In this case, we can note the complete mobility of resources, the unhindered movement of capital and labor between industries. The level of competition is close to perfect.
- Market with ineffective barriers. Characterized by a short-term effect. It will be much cheaper for leading companies to let newcomers in than to finance the construction of barriers.
- Industries with effective barriers. They stand out due to the slow entry of new subjects. Sheer oligopoly and the rise of the dominant company.
- Blocked entry. Operating obstacles in the short or long term. There is a natural monopoly in the industry, and the number of introducing companies often stays the same.
In order to more specifically understand the types of entry barriers to the market, it is necessary to pay attention to the second and third types of industry. In general, there are two types: non-strategic (structural)and strategic (created by firms themselves).
Administrative barriers
The administrative barrier to entry into the market are the rules and recommendations established by the decision of government bodies, which are certain conditions for doing business, taxes and other obligatory payments. Such barriers are formed under the following circumstances:
- regulation and management of access to the resource base and ownership of individual resources (statutory documents, company registration, rent or purchase of premises, leasing or credit, etc.);
- regulation of obtaining permission to carry out the necessary activities (certification, standardization, trademarks, norms and regulations);
- current business activities (all sorts of sanctions and fines, additional control and audit, obtaining benefits, etc.).
Government barriers have a number of consequences, which have an extremely negative impact on the economy of the state. First, they provoke serious economic losses (growth in prices or non-production of the gross product). Secondly, officials and the private structures working with them in the field of setting barriers receive systematic distributive advantages.
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 barriers to entry are:
- systemlicensing companies;
- government control of pricing;
- government monitoring of profitability.
As for the obstacles to exit, here it should be noted:
- costs incurred by the owners of the firm;
- difficulties in liquidating a business.
Besides this, the inflexible and rather rigid system of exiting the market acts as a factor of fear to enter the industry. Thus, the number of participants decreases, the monopoly grows and the economy suffers both locally and globally.
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 buyers 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 typical only for countries with developed economies. In order to stimulate competition, developing countries must give room for foreign competitors to operate.
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 entry barriers tothe market is created by the companies themselves and their behavior towards competitors or potential rivals. Among them are:
- saving innovation;
- arrangements with suppliers on a long-term basis;
- licenses for a certain type of activity and other restrictions;
- increase in marketing and R&D spending.
Besides this, the barriers are manifested in the pricing and sales policy, which are formed by the representatives of the industry. Companies that have been on the market for quite a long time have established trusting relationships with suppliers, buyers, 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.
The first barrier is especially important. Unlike the previous ones, the skill level and mental abilities of a businessman help to let only worthy entrepreneurs into the market and keep ordinary freeloaders out.
Exit Barriers
Competition is intensifying in areas where exit is not allowed, as the costs of moving to another industry or liquidating a business are high. So, monopolies persist, profitability is consistently low or even negative, costs are reaching their critical maximum.
Among the weekendbarriers appear:
- write-off of large investments;
- fear of losing your image and popularity among the clientele;
- managerial ambition;
- interference by public authorities;
- union opposition;
- misunderstanding and protests of contact audiences.
Barriers to exit are not only social or political overtones, they can be filled with emotional recklessness and human fears. In this case, it is necessary to have rational managers or assistants who will help direct the leaders in the right direction.
