Barriers To Entry & Exit (Cambridge (CIE) A Level Economics): Revision Note

Types of barriers to entry

• Barriers to entry are conditions that make it difficult or expensive for a firm to enter a market in order to compete with the existing suppliers

• Barriers to exit are factors that either prevent a firm from leaving a market, or make it difficult to leave even if they are making a loss

Types of barriers to entry

1. Legal Barriers

• Some industries are protected by law, making it impossible or highly restricted for new firms to enter. For example:

  • In certain countries, postal services or energy distribution may be operated under government licences or state ownership

  • A firm may hold a patent for a unique pharmaceutical formula, preventing others from producing or selling the same drug without permission

• These legal protections are often justified by the need for public control, safety, or to reward innovation. However, they limit competition and create exclusive access to markets

2. Market-based barriers

• Established firms often use branding and advertising to build strong consumer loyalty, making it hard for new entrants to gain attention. For instance:

  • A global sportswear brand may flood the market with multiple product lines, giving the illusion of variety while crowding out competitors

  • Collaborative ventures between major firms—such as joint development of new gaming consoles—can raise the resource threshold needed to compete

• In addition, if the market is experiencing low demand due to economic downturns, existing firms may have excess capacity, discouraging new firms from entering

3. Cost barriers

• Some industries require substantial investment before production can begin. These high fixed costs act as a deterrent. Examples include:

  • Aircraft manufacturing, where billions may be needed for design, testing, and production

  • Biotech firms, which must invest heavily in research and development before launching a single product

• Large firms often benefit from economies of scale, allowing them to produce at lower average costs

  • They may use predatory pricing

• In fast-moving sectors like consumer electronics, established firms may already be developing the next generation of products while launching the current one

• Without a unique innovation or niche, new entrants struggle to survive

4. Physical barriers

• Access to essential resources can be restricted. For example:

  • A mining company may control exclusive rights to a rare mineral deposit.

  • A vertically integrated food producer might own farms, processing plants, and retail outlets, making it hard for newcomers to compete without incurring higher costs

• These physical advantages protect incumbents and raise the entry threshold for others

Barriers to exit

• Leaving an industry is not always straightforward

• Firms may face sunk costs, which are expenses that cannot be recovered, such as:

  • Investment in specialised machinery that has no resale value

  • Money spent on product development and marketing that cannot be repurposed

• These costs discourage entry because the risk of financial loss is high if the venture fails

  • The fear of being unable to exit easily can be just as powerful as the difficulty of entering