Economics Essay 37: Barriers to Entry

Distinguish, using examples, between structural and behavioural barriers to entry. 

Structural and behavioral barriers to entry are two types of obstacles that can prevent or limit the entry of new competitors into a market. Let's look at each type and provide examples to distinguish between them:

1. Structural Barriers to Entry: Structural barriers are inherent characteristics of an industry or market that make it difficult for new firms to enter and compete effectively. These barriers are typically related to the industry's structure, resources, or economies of scale. Here are some examples:

a) Economies of Scale: Established companies may enjoy cost advantages due to their large-scale operations, making it difficult for new entrants to match their prices. For instance, in the automobile industry, well-established manufacturers benefit from economies of scale, enabling them to produce vehicles at lower costs compared to new entrants.

b) Capital Requirements: Some industries require substantial upfront investments in infrastructure, equipment, or research and development. This can create a significant barrier for new firms with limited financial resources. An example is the airline industry, where substantial capital is needed to purchase aircraft and establish routes.

c) Intellectual Property Rights: Industries with strong intellectual property protections, such as pharmaceuticals or software, can create barriers to entry. New firms may face challenges in developing innovative products or services due to existing patents or copyrights held by incumbents.

2. Behavioral Barriers to Entry: Behavioral barriers are created by the actions and strategies of incumbent firms to deter or impede new entrants. These barriers are not inherent to the industry's structure but are rather the result of deliberate actions by existing players. Here are some examples:

a) Predatory Pricing: Incumbent firms may engage in predatory pricing, where they temporarily lower prices to drive new entrants out of the market. Once the new entrants exit or are weakened, the incumbents raise prices again. This strategy makes it difficult for new firms to establish a foothold in the market.

b) Exclusive Contracts: Existing companies may establish exclusive contracts with suppliers, distributors, or retailers, limiting the access of new entrants to crucial resources or distribution channels. This practice can hinder the ability of new firms to compete effectively. An example is exclusive distribution agreements in the beverage industry.

c) Brand Loyalty and Switching Costs: Incumbent firms with strong brand recognition and customer loyalty can make it challenging for new entrants to attract customers. Additionally, industries where customers face significant switching costs, such as changing software providers or mobile phone carriers, create barriers for new firms trying to enter the market.

It's important to note that these barriers can often interact and reinforce each other, making entry into certain markets even more challenging for new competitors. Understanding these barriers is crucial for policymakers and businesses to ensure fair competition and promote market entry.