Market entry barriers are these factors that act as obstacles and make it difficult for your business to enter a market. These barriers can come in a variety of ways that vary depending on the industry your company is in. A very common example of this is business start-up costs.
These barriers represent inconveniences for new businesses when entering an industrial sector. However, for already established companies they constitute a benefit since they protect their profits and income since they prevent others from stealing their market share or place.
Types of natural barriers to entry
The entry barriers can be divided into two branches, the “ unnatural entry barriers ” and the “ natural entry barriers ”. Unnatural barriers are created by companies through the government; examples of them are: patents, licenses, trade barriers and regulations.
On the other hand, natural barriers are specific to each industrial sector; they are implicit in the market and are not imposed or created by anyone; they are formed as the dynamics of the industry take shape. Examples of these obstacles are: brand loyalty, geographic barriers and economies of scale.
Additionally, entry barriers can be divided into 4 different groups: legal, technical, strategic and brand loyalty. Here are some examples of barriers in each of these groups.
Legal: patents, licenses or permits, trade barriers, standards and regulations.
Techniques: start-up costs, sunk costs, economies of scale, monopoly or oligopoly, geographic and technological knowledge.
- Strategic: abusive prices, heavy advertising, vertical integration.
- Loyalty to the brand: trust and guarantee of the brand.
Advantages and disadvantages of barriers to entry to a market
Previously, it was explained how entry barriers are a great disadvantage for emerging companies since they hinder their formation and slow down their growth; on the contrary, they are an advantage for businesses with time in the sector as they prevent their place in the market from being taken away.
However, there are clear advantages and disadvantages to entry barriers from a consumer point of view. The biggest advantage derived from barriers is safe products and services. An example of this can be observed in the pharmaceutical industry, where any company that wishes to manufacture drugs must have authorization for their marketing; This authorization is derived from previous clinical trials.
However, entry barriers also have disadvantages, such as inefficiencies in markets. It forces consumers to pay high prices. A clear example of this is the public service companies, which in many cases raise their prices above inflation. This is due to the fact that few competitors can enter the market as the barriers to entry to the market in this sector are extremely high.
Additionally, another disadvantage of these obstacles is that they can lead to the formation of an oligopoly or a monopoly. However, in the vast majority of countries, there are laws that regulate the behavior of companies and mitigate the impact of these barriers.
In conclusion, entry barriers are factors that obstruct the entry of a company to a market; they can be formed naturally or imposed by other people (companies or the government); if they are extremely high, existing businesses can keep emerging companies out.