Competitive Landscape: Classification of Obstacles, and Impact on Market Dynamics
In the dynamic world of business, established companies, or incumbents, often employ strategic measures to maintain their market dominance and deter new entrants. These strategic barriers to entry can take various forms, impacting different industries in unique ways.
One such strategy is predatory pricing, a tactic commonly seen in the retail and consumer goods sector. Incumbent firms may temporarily lower prices to make it unprofitable for new entrants to compete. Once the entrant exits, prices can be raised again, as observed in the retail industry [2][4].
Exclusive agreements, another strategic barrier, are prevalent in the technology and software industry. Incumbent companies may sign exclusive contracts with suppliers or distributors, limiting new entrants' access to essential resources [4].
In the media and entertainment sector, incumbents often use extensive advertising campaigns to flood the market with their brand presence, making it difficult for new entrants to gain visibility [2]. Similarly, in the automotive industry, product differentiation through unique features, branding, or design can make it hard for entrants to compete directly [2].
In the pharmaceuticals and biotechnology industry, incumbents may hold key patents, preventing new entrants from producing similar products without infringing on existing intellectual property [1].
Other strategic barriers include standardization regulations, which require potential entrants to comply with additional costs such as safety requirements, product testing, accreditation, and factory safety. Research and development can also be a substantial barrier, especially in technology-intensive industries where incumbents have invested significant resources.
Limited access to input can be a barrier to entry, especially when existing companies bind raw material suppliers through long-term contracts. Licensing policies can restrict investment in specific sectors or limit the percentage of ownership, hurting new players.
In some cases, incumbents may control distribution networks, reducing potential entrants' access to distribution channels and markets. Special tax relief can also be a barrier to competition, as the government may impose high taxes on newcomers and tax breaks for incumbents.
Vertical integration by incumbents makes it difficult for potential new players to enter by securing input or distribution channels. Barriers to entry vary between market structures. Under perfect competition, there are no barriers to entry. In monopolistic competition, barriers are slightly higher due to product differentiation and incumbents having some market power.
In oligopoly and monopoly markets, barriers to entry are high due to the incumbent dominating the market and preventing new players from entering. Customer loyalty increases switching costs, making it difficult for potential entrants to gain market share.
Strategic barriers are not limited to these examples. Intellectual property, such as patents, give incumbents a legal right to use technology for a specified period, making it difficult for potential new players to enter the market. Subsidies reduce the company's operational costs, making it difficult for newcomers without subsidies to compete.
Experts classify barriers to entry into two categories: strategic and structural. Strategic barriers are due to the behavior of the incumbent, such as predatory pricing and lobbying the government for regulations. Structural barriers are due to the market's nature, such as technology, costs, and demand.
While these barriers can protect market share and maintain competitive advantages for incumbents, they can also lead to market inefficiencies where consumers pay higher prices than when competition is present. In some cases, retaliation is ineffective at preventing new entrants from entering the market.
Despite these challenges, potential new players consider the long-term profits when deciding to enter the market, despite facing strong retaliation from the incumbent. In other cases, the entry of newcomers leads to retaliation from the incumbent, which may be successful in discouraging new players. However, in the long run, competition fosters innovation, improves product quality, and reduces prices, ultimately benefiting consumers.
In the finance sector, incumbent businesses might invest significantly in research and development, particularly in technology-intensive industries, creating a barrier for new entrants who lack the resources to match such investment.
In the industry of venture capitalism, exclusive relationships between established firms and investors can inhibit new entrants from securing the necessary funding, as these relationships might provide preferential access to capital.
