barriers to entry

Barriers to entry are designed to block potential entrants from entering a market profitably. They seek to protect the monopoly power of existing (incumbent) firms in an industry and therefore maintain supernormal (monopoly) profits in the long run. Barriers to entry have the effect of making a market less contestable The economist Joseph Stigler defined an entry barrier as "A cost of producing (at some or every rate of output) which must be borne by a firm which seeks to enter an industry but is not borne by firms already in the industry" This emphasises the asymmetry in costs between the incumbent firm (already inside the market) and the potential entrant. If the existing businesses have managed to exploit some of the economies of scale that are available to firms in a particular industry, they have developed a cost advantage over potential entrants. They might use this advantage to cut prices if and when new suppliers enter the market, moving away from short run profit maximisation objectives - but designed to inflict losses on new firms and protect their market position in the long run. EXAMPLES OF BARRIERS TO ENTRY Patents Giving the firm the legal protection to produce a patented product for a number of years (see below) Limit Pricing Firms may adopt predatory pricing policies by lowering prices to a level that would force any new entrants to operate at a loss Cost advantages Lower costs, perhaps through experience of being in the market for some time, allows the existing monopolist to cut prices and win price wars Advertising and marketing Developing consumer loyalty by establishing branded products can make successful entry into the market by new firms much more expensive. This is particularly important in markets such as cosmetics, confectionery and the motor car industry. Research and Development expenditure Heavy spending on research and development can act as a strong deterrent to potential entrants to an industry. Clearly much R&D spending goes on developing new products (see patents above) but there are also important spill-over effects which allow firms to improve their production processes and reduce unit costs. This makes the existing firms more competitive in the market and gives them a structural advantage over potential rival firms. Presence of sunk costs

Some industries have very high start-up costs or a high ratio of fixed to variable costs. Some of these costs might be unrecoverable if an entrant opts to leave the market. This acts as a disincentive to enter the industry. International trade restrictions Trade restrictions such as tariffs and quotas should also be considered as a barrier to the entry of international competition in protected domestic markets. Sunk Costs Sunk Costs are costs that cannot be recovered if a businesses decides to leave an industry Examples include: " Capital inputs that are specific to a particular industry and which have little or no resale value " Money spent on advertising / marketing / research which cannot be carried forward into another market or industry When sunk costs are high, a market becomes less contestable. High sunk costs (including exit costs) act as a barrier to entry of new firms (they risk making huge losses if they decide to leave a market). A good example of substantial sunk costs occurred in 2001 when British Telecom announced it was scrapping its loss-making joint venture with US telecoms firm AT&T. The closure was estimated to lead to the loss of 2,300 jobs - almost 40% of Concert's workforce. And, it will cost BT $2bn (? 1.4bn) in impairment charges and restructuring costs, and AT&T $5.3bn.

Barriers for the Service Industry

by Nicole Long, Demand Media

Specific barriers exist for all businesses during different phases of business growth and development, such as during start-up and expansion. While not all small businesses will have the same exact barriers, servicebased businesses will run up against some common barriers found throughout the service industry.
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Starting Out
Small businesses offering a service may find the barriers to entry less formidable than a small business that requires large equipment, warehouse space and inventory; however barriers do still exist. Small servicebased businesses must identify any barriers to entry that exist before entering the marketplace. A barrier to entry relates to anything that poses a specific problem when starting the business. This includes economic barriers, such as a low demand for a service, or financial barriers, such as the need for financing to help get the business off the ground.

Regulatory Barriers
Depending on the type of service offered, small service-based businesses may come across barriers related to business regulations and restrictions, just as any business would. For instance, home-based service business will have to comply with zoning restrictions in the community related to the operation of a business out of a home. Regulations and legal barriers exist for licensing a business, hiring and firing employees and maintaining safety standards on the job. Other concerns relate to conforming to local and state laws surrounding the collection and payment of taxes.

Growth
Service-based businesses may run up against various barriers during periods of desired growth and expansion. While traditional product-oriented businesses can use their products as a way to advertise, service businesses must find other ways to attract customers. This can be done through the creation of a catchy service slogan or via customer referrals. Other barriers service businesses may face during expansion include continuing to meet customer service standards and providing the same level of service to existing clients in spite of an increased workload.

Other Barriers
Service businesses that operate across several states, or even on an international level, may run into barriers that can impact potential profits. These barriers can include taxes on the use of telecommunications equipment located in foreign countries and the need to meet regulations and restrictions of various states or countries. Other barriers in a service-based business relate to the reliability of workers and staff. In a service business, client satisfaction and repeat business rests solely on the ability of the company to fulfill promises made to the client, regarding things such as arrival time and accessibility.

Barriers to Entry in the Restaurant Industry

By Scott Christ, eHow Contributor

A restaurant can be a profitable business with relatively low barriers to entry.

The restaurant industry has low barriers to entry, making it an attractive new business option for many entrepreneurs, according to the University of West Georgia. Though consumers often hear statements like, "The majority of new restaurants fail," in reality, only one in four restaurants close or change ownership within their first year of business, says H.G. Parsa, an associate professor in Ohio State University's Hospitality Management program. With that said, there are still several common barriers to entry in the restaurant business you need to be aware of.

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Lack of Start-Up Capital

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Lack of sufficient start-up capital is one of the biggest barriers to entry in the restaurant industry. Starting a restaurant is an expensive venture. According to a 2010 industry survey of over 400 restaurants owners, the average start-up cost for a restaurant with $425,000 in annual sales is $125,000 with no land purchase and $175,000 with land purchase. For a restaurant that brings in $850,000, the average start-up is $225,000 with no land purchase and $375,000 with land purchase. Restaurant owners can secure start-up funding through friends and family, bank loans, Small Business Administration loans and venture capital.

Consumer Skepticism
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Another barrier to entry in the restaurant industry is overcoming customer skepticism. Building a brand takes time, and customers may be wary of your new restaurant when you are first starting off. For example, if you are starting a restaurant focused on healthy eating, some people may perceive your food as being tasteless and bland because it's healthy. However, once you have been in business and have established a credible brand presence, you will be in a much better position with your restaurant.
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Location
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Location can be another barrier to entry in the restaurant industry. The location of your business is one of the most important factors to the success of your restaurant. If you are scouting locations and you are not able to secure land or a lease at your preferred location, you may be forced to consider other less attractive options. Plus, if you want to lease a current restaurant space, you may be looking at major renovations if the retail space is not currently built for a restaurant.

Marketing
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The amount of marketing you need to do when first starting out may be another barrier to entry in the restaurant business. To help spread the word about your new business, you need to develop a marketing strategy, and this takes money and time. Some prospective restaurant owners do not have the marketing backgrounds necessary to run this part of the business. In these cases, it's best to hire a marketing professional who can help you develop a marketing strategy for your restaurant.

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