What Barriers Prevent Firms From Entering the Markets?
The idea that there are barriers preventing firms from entering markets and barriers preventing them from leaving those markets views markets as similar to fields surrounded by gates of differing sizes and complexity. The gates have to be surmounted by firms wishing to enter or leave these markets. To some extent the gates can be both raised and lowered, not just by those inside the fields but also by those outside wishing to enter.
Typical barriers to entry include patents, licensing agreements and exclusive access to natural resources. A patented pharmaceutical, for instance, gives the patent holder exclusive rights for a certain period (usually a maximum of seven years) to manufacture and sell that pharmaceutical within a specified market. The economies of scale (see page 80) that can be gained from being large and established in a particular field can also act as a barrier to entry. If new entrants calculate that they need to sell large volumes before they can hope to be competitive with existing firms, this acts as a deterrent to their ambition.
When, for instance, did a new entrant last try to begin manufacturing for the mass car market? Barriers to entry can also be erected by governments. Regulations covering the financial services industry are designed to act as a barrier to rogues and villains, but inevitably they also deter many honest busi- nesses too. Not so long ago, foreign banks could not operate in the UK unless they had an office within walking distance of the Bank of Eng- land, then the industry’s regulator. Needless to say, property prices in the City of London’s “Square Mile” were among the highest in the world and acted as a powerful barrier to entry. Firms that are well established in a particular field or market may be tempted to raise the barriers when they see a newcomer approaching their patch. They can do this, for instance, by lowering their prices, thus making the newcomers’ products less competitive.
Moreover, lowering prices may be an easy option for the incumbents since their prices may well have been higher than the free-market level because of the barriers. Monopolies exist where there are insurmountable barriers to entry. If there were no (or only low) barriers, other firms would enter monopoly markets to participate in the monopoly profits. Barriers to exit make it more difficult for a company to get out of a particular business than it would otherwise have been. They include things like the cost of laying off staff and of contractual obligations, such as the payment of rent.
For a classic high-street bank with a large number of staff and a wide network of branches, the barriers to exit from traditional banking businesses are considerable. Paradoxically, firms sometimes decide for themselves to erect barri- ers that hinder their own exit from a market. This can be a strategic ploy designed to convey to their competitors the message that they are com- mitted to that market, and that they are not going to leave it in a hurry. Barriers to mobility are those gates that hinder a firm from one indus- try from moving into another (or, as Michael Porter put it in Competitive Strategy, first published in 1980, “factors that deter the movement of firms from one strategic position to another”). For example, supermar- kets in the UK that wish to go into the banking business are prevented from doing so on their own. They have to form an alliance with an existing registered bank because UK regulators cannot yet countenance the selling of loans and of soap powder by the same organisation. Simi- larly, supermarkets face barriers to becoming online Internet service providers. One of the highest is the fact that they already own massive chunks of land and buildings
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