Barriers to entry

Indian Economy glossary

Also called: Entry barriers · Topic: Market Structures, Market Failure and Competition · NCERT: Beyond NCERT

Meaning

Barriers to entry are obstacles that keep new firms out of a market. Common ones are:

  • economies of scale, where huge fixed costs make a small newcomer too costly to run;
  • patents and copyrights;
  • government licences;
  • control of a key input, such as a mine or a pipeline;
  • network effects, where a product becomes more useful as more people use it;
  • switching costs, the trouble buyers face in changing supplier.

Barriers matter because they let existing firms keep prices above cost without new rivals coming in to push prices down. High barriers are what separate monopoly and oligopoly from competitive markets.

Example

A new mobile operator needs spectrum, which is a government licence. It also has to spend very heavily on towers before it earns anything. This is why Indian telecom has only a few players, while anyone can open a restaurant.

Don't confuse with

  • Product differentiation: this gives a firm some control over price through its brand or design, even when entry is free, as with soaps and restaurants. A barrier stops newcomers from entering at all.

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