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Barriers to entry are factors which prevent or deter the entry of new firms into an industry even when incumbent firms are earning excess profits.

There are two broad classes of barriers: structural (or innocent) and strategic. These two classes are also often referred to as economic and behavioural barriers to entry. Structural barriers to entry arise from basic industry characteristics such as technology, costs and demand. There is some debate over what factors constitute relevant structural barriers. The widest definition, suggests that barriers to entry arise from product differentiation, absolute cost advantages of incumbents, and economies of scale. Product differentiation creates advantages for incumbents because entrants must overcome the accumulated brand loyalty of existing products. Absolute cost advantages imply that the entrant will enter with higher unit costs at every rate of output, perhaps because of inferior technology. Scale economies restrict the number of firms which can operate at minimum costs in a market of given size.

A narrower definition of structural barriers suggests that barriers to entry arise only when an entrant must incur costs which incumbents do not bear. This definition excludes scale economies as a barrier.

Source Publication:
Glossary of Industrial Organisation Economics and Competition Law, compiled by R. S. Khemani and D. M. Shapiro, commissioned by the Directorate for Financial, Fiscal and Enterprise Affairs, OECD, 1993.


Statistical Theme: Financial statistics

Created on Thursday, January 3, 2002

Last updated on Friday, March 15, 2002