- Two economists' definitions
- Primary, ancillary and antitrust barriers
- Natural and artificial barriers
- Barriers by market structure
- The catch: high profits don't always pull in competitors
- Natural monopoly, in numbers
- Legal and resource barriers, with US examples
- How to map the barriers in your own market
- Where I come in
- My verdict
- Frequently asked questions
Barriers to entry are obstacles that make it hard for a new company to break into a market, such as high start-up costs, regulation, patents, licensing requirements or the technology needed to compete. They protect the businesses already there, which is why some markets stay crowded while others have only one or two players.
That list comes from Corporate Finance Institute (CFI). The idea sounds simple, but economists have argued about the exact definition for decades, and the two classic versions are worth knowing because they point at different things.
Two economists' definitions
CFI quotes Joe S. Bain, who described a barrier as an advantage that established sellers have over potential entrants, shown by how far they can keep prices above competitive levels without attracting anyone new. It also quotes George J. Stigler, who defined it as a cost a newcomer has to bear that firms already in the industry don't.
Stigler's version is the more useful one for a small business. It turns the question into a list: what will a newcomer have to pay for that you've already paid for, or never had to?
Primary, ancillary and antitrust barriers
CFI adds three labels. A primary barrier is a cost that blocks entry on its own. An ancillary barrier doesn't block entry alone, but it reinforces other barriers. An antitrust barrier is a cost that delays entry and reduces social welfare. CFI says all barriers to entry are antitrust barriers, but not every antitrust barrier is a barrier to entry.
Natural and artificial barriers
| Type (CFI) | Examples |
|---|---|
| Natural (structural) | Economies of scale already used by incumbents; network effects; high research and development costs; high set-up costs, many of them sunk, such as advertising; ownership of key resources or raw materials |
| Artificial (strategic) | Predatory pricing or buying out a rival; limit pricing (low price, high output so an entrant can't profit); heavy advertising; strong brand loyalty; contracts, patents and licences; loyalty schemes; switching costs |
Switching costs deserve a closer look, because they're the barrier small businesses deal with most. CFI lists new equipment, loss of service during the change and the effort of learning a new system. If your customers would face all three to leave you, that's a barrier you've built, whether you meant to or not.
Barriers by market structure
| Market structure (CFI) | Level of barriers to entry |
|---|---|
| Perfect competition | Zero |
| Monopolistic competition | Medium |
| Oligopoly | High |
| Monopoly | Very high to absolute |
CFI says barriers become dysfunctional when they're so high that incumbents keep out virtually every competitor.
The catch: high profits don't always pull in competitors
The textbook story says that if a market is very profitable, new firms rush in and push prices down. OpenStax, the free economics textbook, points out that barriers can block entry even while the firms already in the market are earning profits. So in markets with significant barriers, high profits don't necessarily attract newcomers at all.
OpenStax also shows how wide the range is. A barrier can be as ordinary as the cost of renting retail space, or as restrictive as owning every available radio frequency.
Natural monopoly, in numbers
When economies of scale are large compared with demand, one producer can serve a market more cheaply than several. OpenStax's example is an airplane industry where economies of scale run up to 8,000 planes a year, costs stay flat from 8,000 to 20,000, and the whole market only wants 5,000 planes. There's room for one producer.
Its lower-tech example is a water company. Laying the main pipes is expensive, but once they're in, connecting one more home costs very little, so a second company could never match the first on price.
Legal and resource barriers, with US examples
OpenStax's examples are American. In the US, only the Postal Service may deliver first-class mail, and many cities allow a household one water company. Control of a scarce resource works the same way: ALCOA controlled most of the bauxite supply in the 1930s, and DeBeers controls the majority of global diamond production.
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Then there's intimidation. OpenStax describes predatory pricing as a firm using the threat of sharp price cuts to discourage competitors. It's a violation of US antitrust law but hard to prove. OpenStax's example is a large airline slashing its prices on a route as soon as a small start-up airline appears on it.
In strategy terms, all of this feeds the threat of new entrants, one of Porter's five forces.
How to map the barriers in your own market
- List the costs a newcomer would have to pay that you've already paid.
- Check the licences, patents and regulation that apply in your market.
- Look at switching costs and network effects from the customer's side.
- Rate each barrier low, medium or high.
- Decide whether to build a barrier of your own, such as brand, community or contracts, or to find a market where the barriers are lower.
A competitive analysis will give you most of what you need for steps one and three.
Where I come in
CFI lists strong brand loyalty and heavy advertising among the barriers firms build on purpose. For a small business, the version that's within reach is a brand people recognise and an audience that already trusts you. Those take time to build, which is exactly why a newcomer can't copy them quickly. I've spent 23 years in marketing, and I help small businesses and SaaS marketing teams build that kind of brand and audience. You can see how I work on my work with me page.
My verdict
If you're the newcomer, treat barriers as a map of where not to fight. Look for the corner of the market where the costs to enter are lowest and the incumbents aren't paying attention. If you're established, stop relying on being first. Brand, community and switching costs are barriers you can build on purpose, and they'll protect you far longer than a head start will.
Frequently asked questions
What are barriers to entry in simple terms?
They're obstacles that make it hard for a new business to enter a market, such as start-up costs, regulation, patents or licences.
What is the difference between natural and artificial barriers to entry?
Natural barriers come from the structure of the market, such as economies of scale. Artificial barriers are created by firms, such as patents, loyalty schemes or predatory pricing.
What's an example of a barrier to entry?
OpenStax's examples include the US Postal Service's legal right to deliver first-class mail and DeBeers controlling most global diamond production.
Do high profits always attract new competitors?
No. OpenStax says barriers can block entry even when the firms already in the market are earning profits.
Which market structure has the highest barriers to entry?
CFI says a monopoly has very high to absolute barriers, and perfect competition has none.
