Barriers To Entry

Barriers to Entry Introduction Before a firm can compete in a market, it has to be able to enter it. Many markets have at least some impediments that make it more difficult for a firm to enter a market. A debate over how to define the term “barriers to entry” began decades ago, however, and it has yet to be won. Some scholars have argued, for example, that an obstacle is not an entry barrier if incumbent firms faced it when they entered the market. Others contend that an entry barrier is anything that hinders entry and has the effect of reducing or limiting competition. A number of other definitions have been proposed, but none of them has emerged as a clear favourite. Because the debate remains unsettled but the various definitions continue to be used as analytical tools, the possibility of confusion – and therefore of flawed competition policy – has lingered for many years. More recently, other commentators have concluded that while the debate about defining entry barriers may be intellectually interesting, it is irrelevant to competition policy. They argue, is not whether an impediment satisfies this or that definition but rather the more practical questions of whether, when, and to what extent entry is likely to occur. Regardless of whether there is a consensus on a definition, or even whether the definition ultimately matters, it is undeniable that the concept of entry barriers plays an important role in a wide variety of competition matters because it is vital to the analysis of market power. Entry barriers can retard, diminish, or entirely prevent the market’s usual mechanism for checking market power: the attraction and arrival of new competitors. Entry barriers effect on competition Barriers to entry are important because they are relevant in virtually every kind of competition case other than per se offences such as participating in a hard-core cartel. It is necessary to consider entry barriers when assessing dominance, when determining whether unilateral conduct might deter new firms from participating in a market, and when analyzing the likely competitive effects of mergers, to name a few examples. If a merger will substantially increase concentration to the point where a competition agency is concerned about possible anticompetitive effects, entry barriers matter because competition will not be reduced if new firms would enter easily,

quickly and significantly. Consequently, agencies seeking to block a merger will usually need to show that entry barriers make quick, significant new entry unlikely. Similarly, establishing the presence of substantial entry barriers is usually necessary to prove that a high market share translates into market power in monopolization and abuse of dominance cases.

Automotive Industry: The barriers to enter in the automotive industry are substantial. For a new company, the startup capital required to establish manufacturing capacity to achieve minimum efficient level is highpriced. An automotive manufacturing facility is quite specialized and in the event of failure could not be easily retooled. Although the barriers to new companies are substantial, established companies are entering new markets through strategic partnerships or through buying out or merging with other companies. In fact, the barriers to entry for new (or different) markets may be quite low; in the 1980s, U.S. companies Team practically invited Japanese makers into the U.S. by failing to offer quality vehicles in the lower price markets. All of the large automotive companies have globalized and entered foreign markets with varying degrees of success. In the newer, undeveloped markets of Asia, Africa, and South America, the barriers to entry similarly exist. However, a domestic start up, with local knowledge and expertise, has the potential to compete in its home market against the global firms who are not yet well established there. Such an operation, if successful, would surely be snatched up by one of the global giants and incorporated into its fold.

Soft Drinks Industry: Not only in the soft drink industry but almost in most of the cases, the strength of the distribution channel of the giant companies will easily be your single biggest barrier. The next big barriers are marketing budgets and investments in production facilities. The large retailers have significant leverage. If you are an existing player, and want to expand your product line, then there will be different challenges say from soft drinks to health drinks. Then the key challenge will be in communicating the shift to your consumers, and realigning your distribution to focus. If you are a new entrant, you may as well want to study the recent trends in soft drink consumption and its contribution to profitability for the market where you plan to enter, before deciding whether it’s worth entering that market. This data is publicly available in different forms, including annual reports of the giants like Pepsi, coca cola, etc. Spotting the niche market is the best way to enter the market as in case of Gourmet Cola. The opportunity that a product designed for a niche market, say a particular age group, or cultural type, or specific location like Lahore, may be tremendous, and tougher for a giant to spot. First it’s important to mention that barriers to entry largely depend of the market you are seeking to enter. However, here are some of the barriers you will find when it comes to the soft drink industry: 1) Existing players, particularly those with well-established distribution channels and brand awareness (Pepsi co., Coca-Cola, etc). 2) Production costs which are substantial. 3) Access to distribution channels. 4) Creating brand awareness and achieving market acceptance (local tastes and preferences). 5) Government regulations and licensing (if required).