What are barriers to entry?

A barrier to entry is an obstacle that prevents a new entrant from joining a market. They exist within both oligopolistic and monopolistic market structures. Barriers to entry matter because in the short run, all firms can make abnormal profits. However, in the long run, abnormal profit is only possible in markets that are protected by barriers to entry. 

Types of Barrier to Entry

1. High Start Up Costs: For example, in the aviation industry, new entrants to the market will have to purchase very expensive aircraft to join the market. It may be difficult for entrepreneurs to raise the long-term capital needed to pay for the aircraft required to set up the business, especially in the current financial climate, where credit is expensive and in short supply. Sunk costs are costs that cannot be recovered if a new entrant subsequently decides to exit the industry. High sunk costs may also be a barrier to entry for firms wanting to enter a market. 

2. Economies of Scale: Economies of scale cause average cost to fall when a firm grows larger in the long-run. In many transport markets, technical economies of scale are very important. Small firms that are potential new entrants could be put off from joining the market because, without ecnoomies of scale, their costs, and therefore prices, would be too high. As a result the new entrant would struggle to survive.

3. Branding and Brand Loyalty: Brand loyalty is said to exist when consumers repeat purchase the same brand over and over again, instead of swapping and switching between brands. In a market where there is established brand loyalty, new entrants might struggle to establish themselves, creating a barrier to entry. It is usually very expensive for a new firm to develop a brand imagine, via advertising, that will be strong enough to break existing brand loyalties within the market. 

4. Legal Barriers to Entry: In the air travel market, for example, many markets are regulated, ie. take off and landing rights are controlled. This creates an insurmountable barrier to entry for other firms wanting to enter the market. Another example is the rail industry, where, on most routes, the Department for Transport only grants one Train Operating Company (TOC) a franchise to operate train services on a particular route. 

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