What Are Barriers to Entry?

Barriers to entry is an important factor that affects the market structure. It refers to the extent to which existing companies in the industry have certain advantages over potential companies and new companies that have just entered the industry. In other words, it refers to the various adverse factors that potential entry companies and new enterprises may encounter if they compete with existing enterprises. Entry barriers have the effect of protecting existing companies in the industry, and are also the difficulties that potential entrants must first overcome when they become real entrants.

Barriers to Entry

Barriers to entry is an important factor that affects the market structure. It refers to the extent to which existing companies in the industry have certain advantages over potential companies and new companies that have just entered the industry. In other words, it refers to the various adverse factors that potential entry companies and new enterprises may encounter if they compete with existing enterprises. Entry barriers have the effect of protecting existing companies in the industry, and are also the difficulties that potential entrants must first overcome when they become real entrants.

Chinese name

Barriers to Entry

Foreign name

Barriers to entry

Definition

University of Chicago Economist

There are many reasons for the formation of barriers, mainly:

According to the causes of entry barriers, it is divided into two categories: structural entry barriers and strategic entry barriers.

In the long run, barriers to entry have a dual effect on social welfare:

On the one hand, the barriers to entry are related to

Economically, the barriers to entry are a "double-edged sword": on the one hand, the existence of barriers to entry causes

I. Administrative Monopoly Barriers

Taking the telecommunications industry as an example, the State issued the "Telecommunications Regulations of the People's Republic of China" on September 25, 2000. The Regulation has formulated a total of 8 important management systems: telecommunications business license system, telecommunication network interconnection regulation system, telecommunication tariff management system, telecommunication resource paid use system, telecommunication service quality supervision system, telecommunication construction management system, and telecommunication equipment access to the network System and telecommunication security guarantee system. Although the regulations allow private companies to operate telecommunication value-added services such as Internet information services for the first time, they also stipulate that: to operate basic telecommunications services, the operator shall be a company established in accordance with the law and specializing in basic telecommunications services, and the company shall have not less than 51 shares %. The regulations not only set the entry threshold for the telecommunications industry, but also the price of telecommunications tariffs. Such an administrative industry monopoly with a planned economy has led to a large loss of social welfare. It is estimated that even if an IP phone card is sold in half, the telecommunications sector can make 15 times the profit. The actual domestic long-distance cost of China Telecom's IP phone is only 0.08 yuan, and the actual cost is 0.3 yuan; the actual international long-distance cost is 0.6 yuan, but it is charged at 4.8 yuan. This high profit, from an economic point of view, will attract many other low-profit industries to the telecommunications industry, but the actual situation is different. Due to excessive state administrative intervention in the industry, it has formed a high industry administrative barrier, making it difficult for other enterprises and social forces to enter the field for fair competition. As a result, it will inevitably cause high product quality and substandard prices, and restrict the industry. The development of China has also adversely affected the development of the entire service industry.

2. Barriers to economies of scale

Scale economy is an important variable that affects the market structure. The relative scale of the output of scale economy and market demand determines the number of manufacturers that a market can accommodate. The larger the economies of scale, the fewer manufacturers can be accommodated under a certain market demand, and the higher the market concentration.

Large-scale indicators for measuring the level of industrial market barriers include: the ratio of economic scale to the total market size, the amount of necessary capital, the number of patents granted to industries and enterprises, and the proportion of sales to total economic costs. A well-known Japanese economist, Zhi Caoyi, proposed a method of measuring the barriers to entry of industries by using the scale of economic scale barriers:

Scale barrier factor d = (optimal scale / market capacity) × 100%

The measurement standard proposed by Zhicaoyi is: when d = 10% 25%, the industry is a barrier of high scale economy; when d = 5% 9%, the industry is a barrier of high scale economy; when d <5%, The industry is a medium or low-scale obstacle to economies of scale.

The second measurement method is an indicator of the level of profitability. The measurement classification standard proposed by Bain is: when the sales price is 10% higher than the average cost, the industry still difficult to enter for new companies is a high barrier industry; when the sales price is 6% 8% higher than the average cost, it is still difficult for new companies The entry industry is a high barrier industry; when the sales price is 4% higher than the average cost, the industry that is still difficult for new enterprises to enter is the medium barrier industry; if the sales price is 1% 2% higher than the average cost, it is easy for new enterprises to enter The industry is a low barrier industry.

From the perspective of the service industry in Heilongjiang Province, the performance barriers of scale economy are more prominent in the monopoly service industry. In the current economic development, it is difficult for a region to rely solely on the development of traditional catering and entertainment service industries, which is difficult to give a greater impetus to economic development. Working. Some emerging industries have inherent economies of scale due to their operating characteristics. If policies restrict the entry of various private capital, this barrier will be exacerbated, hindering the development of itself and the economy as a whole.

Barriers to the amount of necessary capital

The amount of necessary capital is the production and operating capital that a new enterprise must enter to enter the market. The amount of necessary capital in different industries varies greatly due to different requirements in terms of technology, production, and sales. The greater the amount of necessary capital, the more difficult it is to raise capital, and the higher the "threshold" of capital for new enterprises to enter. Taking the financial and insurance industry in Heilongjiang Province as an example, the financial and insurance industry uses funds as capital, and the amount of funds required by this industry is far greater than that of other industries. Enterprises that can enter the industry must have sufficient financial strength to back them up before they can operate.

Table 1.2002 Assets of financial institutions in Heilongjiang Province Table Unit: 10,000 yuan

Source: Heilongjiang Financial Yearbook 2002

As can be seen from Table 1, the total assets of the financial industry in Heilongjiang Province exceeded 1 billion yuan, and the assets of ICBC exceeded 100 billion yuan. In other words, if other companies want to enter the industry, their total assets must reach at least over 100 million yuan. Such a high capital barrier may be beyond the reach of SMEs.

The telecommunications industry itself is a capital-intensive and knowledge-intensive industry, which determines that it has higher capital barriers as well as higher technical barriers. For example, the broadband access technology is practical. The XDSL technology represented by ADSL, with its objective rationality and low cost, and relying on the existing domestic fixed-line subscriber line resources, has become the main broadband access method promoted by major operating companies. The VSDL technology using the Ethernet bearer technology is used to provide short-distance high-speed data intervention services to areas where users are relatively dense, and has gradually attracted the attention of the industry. In order to tap the potential of the existing network and better provide value-added service applications, major telecom operators are actively developing or applying various value-added service network technologies, such as IP video, MPLSVPN, and media browsing. It can be said that in this industry, whoever takes the lead in possessing the latest and optimal technology has the magic weapon to compete for market share. If other companies want to enter the industry, these patents and technologies are an insurmountable gap.

Compared with the above industries, community service industry, catering and entertainment industry, etc., these industries require relatively less capital and technology, so the barriers for new enterprises to enter the industry are relatively small.

Regional barriers

Regional barriers refer to barriers to industry entry due to external natural and social reasons such as the region's economy, educational level, traffic conditions, and historical reasons. Relatively speaking, the municipalities, provincial capitals, and special economic zones have faster economic development than their surrounding cities and counties, and their industries are relatively complete. There are more opportunities for industry transformation, and their relative barriers to entry are lower than in economically backward areas. The following takes the insurance industry in Heilongjiang Province as an example to further illustrate the impact of regional barriers on the industry. Table 2 Statistics of outlets of life insurance member companies in the second half of 2003

	China Life Insurance	Pacific Life	Ping An Life	New China Life	Taikang Life
Harbin	544	178	206	326	174
Qiqihar	340	44	48	108	87
Mudanjiang	401	196	98	190
Jiamusi	184	40	62	100
Daqing	214	46	98		85
Jixi	399	18	47
Hegang	101	96
Shuangyashan	37	164
Qitaihe	38	14
Suihua	179	144		48
Heihe	217	twenty four
Yichun	210	28
Daxinganling	139

It can be seen from Table 2 that the development of the insurance industry in Heilongjiang Province in various regions is extremely uneven. Kazakhstan, Qi, Mu, Jia and other large cities occupy most of the market share of Heilongjiang Life Insurance, while the relatively backward economies of Jixi, Hegang, Shuangyashan, Heihe and other regions not only have a small market share, but also Xinhua and Taikang insurance companies. There are no outlets in the area.