barriers to entry

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Factors that prevent competitors from entering a particular market. These factors may be innocent, e.g. an absolute cost advantage on the part of the firm that dominates the market, or deliberate, such as high spending on advertising to make it very expensive for new firms to enter the market and establish themselves. Other entry barriers may result from a firm's technological advantage, often protected by patents, or from a firm's existing access to end users as a result of its control of the distribution network. Barriers to entry reduce the level of competition in a market, i.e. they make it less contestable, thereby by enabling incumbents to charge higher-than-competitive prices. See also limit price.

If a particular market for a product is dominated by a large multinational corporation, barriers to entry for smaller firms may be formidable: the multinational may be able to produce the product more cheaply because of economies of scale, the existing product may have built up a strong brand loyalty, the multinational may control the supply of raw material, or own the patent rights to all or part of the production process.

Subjects: Marketing.

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