Question

a.Define barriers to entry, as discussed by Prof. Joe Bain in 1956. b. List 6 different types of barriers that maybe found in some industries and discuss

Answer 1

A. ( Joe Bain, 1956 ): A barrier to
entry is an advantage of established sellers in an
industry over potential entrant sellers, which is
reflected in the extent to which established sell-
ers can persistently raise their prices above
competitive levels without attracting new firms
to enter the industry.

B. Sources of barriers to entry into a market
There are seven sources of barriers to entry:

Economies of scale
These are declines in the unit costs of a product as the absolute volume per period increases. These force the entrant to either come in at a large scale (risking strong reaction from incumbents) or a small scale (forcing a cost disadvantage).

Product differentiation
Incumbents have brand identification and customer loyalties. This forces entrants to spend heavily to overcome these loyalties. Startups may bring a different product to market, but its benefits must be clearly communicated to the target customer. Startups must find an effective positioning, which often requires marketing resources beyond their means.

Capital requirements
These are the financial resources required for infrastructure, machinery, R&D and advertising. Startups may get around capital requirements by outsourcing parts of the operation to companies that can leverage existing investments.

Switching costs
These are one-time costs the buyer faces when switching an existing supplier’s product to a new entrant (for example, employee retraining, new equipment, technical support).

Cost disadvantages independent of scale
Incumbents may have cost advantages that cannot be replicated by a potential entrant. Factors include the learning or experience curve, proprietary product technology, access to raw materials, favourable locations and government subsidies.

Government policy
Governments can limit or prevent entry to industries with various controls (for example, licensing requirements, limits to access to raw materials). Startups in highly regulated industries will find that incumbents have fine-tuned their business according to regulation.

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