Barriers to Entry
Candlefocus EditorOrganic barriers to entry exist when cost advantages give existing companies an advantage over any potential new entrants. In other words, the incumbent has a cost advantage that is difficult for new competitors to match. This can include economies of scale in production, or a well-known brand name that allows them to charge higher prices than new entrants. Examples of organic barriers to entry include strong patents and established distribution networks.
Government intervention is an artificial form of barrier to entry that is created to protect an industry from competition or to protect consumers from price-gouging. Examples of this type of barrier to entry include tariffs, taxes, or specific regulations. These types of barriers to entry make it difficult for new companies to enter the market, as they must contend with higher costs or higher barriers of entry than incumbents.
Many incumbents actively strive to create additional barriers to entry by using their existing resources to acquire intellectual property rights or build brand recognition. This “ratcheting up” approach to market protection helps incumbents maintain their current market share and can also lead to higher prices within the industry.
Overall, barriers to entry work by increasing the cost of entry for new companies. This creates a competitive advantage for existing incumbents, which encourages competition and innovation. However, excessive barriers to entry can be harmful to consumers, as they may lead to higher prices and a lack of choice. In this way, the key is to strike a balance between providing a competitive edge for incumbents and protecting consumers from exploitation.