Barrie of Entry

Barriers to Entry

One of the reasons the financial results across industries differ is due to the barriers of entry of different industries. Barrier of entry is the existence of high start-up costs or other obstacles that prevent new competitors to enter the industry easily. It benefits the existing companies as it protects their revenues and profits from being whittled away by new entrance. There are many factors that act as barriers to entry. The two most important factors are capital requirements and government policy and regulations. Besides, economic conditions, branding, network effects, intellectual property, access to input and distribution and proprietary knowledge are the factors.

Economic conditions include the costs of producing, marketing and selling to be borne a new entrant. This emphasizes the asymmetry in costs between existing companies and new companies. The existing companies may possess cost advantage due to their economies of scale. Sunk costs refer to costs that cannot be recovered if a business decides to leave an industry. This is especially important when the industry have very high start-up costs or a high ratio of fixed costs. Part of the costs might not be recovered if new entrant decided to leave the industry. So, high sunk costs can act as a barrier to entry of new companies.

High barrier of entry may exist due to government intervention or it may occur naturally within the business world. Some examples of government intervention are industry regulation, special tax benefits to existing companies and legislative limitations on new firms. Governments may enforce new rules and regulations to protect the domestic market and the existing companies. On the other hand, some naturally occurring barriers to entry may be patents, strong brand identity, strong customer loyalty or high customer switching costs.

From the eight industries given, health products and newspaper industries have higher barriers to entry. As compared to other...