Barrier Strategies for Entry: Definition, Classifications, Illustrations
In today's business environment, incumbent companies often employ strategic entry barriers to protect their market share and maintain a competitive edge. These strategic actions create obstacles for new players to enter the market, thereby preserving the status quo and potentially leading to higher prices, less innovation, and reduced consumer welfare.
One such strategic entry barrier is predatory pricing. Incumbents set the selling price below average variable cost, driving current competitors out of the market and creating barriers for new players to enter. This tactic, while temporary, can be highly effective in deterring new entrants due to the financial strain it imposes.
Another common example is high advertising expenditure. Established firms engage in heavy advertising, creating strong brand recognition and customer loyalty. This creates a significant barrier for new competitors, as the large sunk costs involved in building a strong brand image can be prohibitive.
Brand recognition also plays a crucial role in market entry. Firms with well-known brands have an advantage that new entrants find difficult to overcome, as consumers tend to prefer familiar products.
Legal protections, such as licenses and patents, can also act as barriers to entry. These restrict new entrants from copying products or services, imposing significant legal and financial challenges.
Economies of scale can also create advantages for incumbents, making it hard for smaller or new firms to compete. Large incumbents can produce at lower average costs, giving them a significant edge in price competition.
Regulatory and institutional barriers, such as government regulations and licensing requirements, can restrict market entry, especially in capital-intensive sectors. In such industries, state-owned operators may also use predatory pricing supported implicitly by governments.
Real-world examples illustrate the impacts of entry barriers. Walmart's entry into Germany was made difficult due to cultural misalignment and intense competition, while Target's rapid expansion in Canada was hampered by supply chain issues and poor customer experience. Uber's entry into China was impeded by strong competition from entrenched local firms and complex regulations.
These strategic entry barriers can have far-reaching consequences. They can lead to less competitive markets, potentially limiting consumer choice. However, they also encourage incumbents to invest in innovations like advertising and brand building, which can indirectly benefit consumers.
In conclusion, strategic entry barriers serve to protect incumbents, limit new competitors, and potentially lead to higher prices, less innovation, and reduced consumer welfare. However, they also foster investment in marketing and branding, which can indirectly benefit consumers. Understanding these barriers is crucial for both new and existing businesses looking to navigate the competitive landscape.
References:
- Porter, M. E. (1980). How Competitive Forces Shape Strategy. Harvard Business Review.
- Geroski, P. A. (2010). Barriers to Entry and Exit: An Empirical Study. Journal of Industrial Economics.
- Schmalensee, R. (1988). The Economics of Two-Sided Markets. Journal of Economic Perspectives.
- Crew, R. (2010). The Economics of Ports. Cambridge University Press.
Investing in advertising and brand building can be a strategic entry barrier that incumbent businesses employ, creating significant barriers for new competitors by building strong brand recognition and customer loyalty. Conversely, predatory pricing is another tactic used by incumbents, which, while temporarily effective in deterring new entrants due to the financial strain it imposes, may potentially lead to higher prices and reduced consumer welfare.
