October 1, 2022 

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SAVING: The after-tax disposable income of the household sector that is not used for consumption expenditures. In general terms, saving is the use of income to purchase legal claims through financial markets rather than the direct purchase of physical goods and services. In the macroeconomic world modeled by the circular flow, saving is the diversion of household income away from consumption and into the financial markets. In this model, saving is a primary source of funds used for business investment expenditures for capital goods. Saving is also used to finance government expenditures.

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Institutional, government, technological, or economic restrictions on the entry of participants into a market or industry. The four primary barriers to entry are: (1) resource ownership, (2) patents and copyrights, (3) government restrictions, and (2) start-up cost. Barriers to entry are a key reason for market control and the inefficiency that results. In particular, monopoly, oligopoly, monopsony, and oligopsony often owe their market control to assorted barriers to entry. By way of contrast, perfect competition, monopolistic competition, and monopsonistic competition have few if any barriers to entry and thus little or no market control.
Barriers to entry enable market control by limiting the number of competitors and thus the availability of close substitutes. Barriers that limit entry into the supply side of market mean that buyers have fewer buying alternatives, which give the sellers greater market control. Barriers that limit entry into the demand side of market means that seller have fewer seller options which give the buyers greater market control.

The four primary barriers to entry are: (1) resource ownership, (2) patents and copyrights, (3) government restrictions, and (2) start-up cost.

Resource Ownership

One of the most fundamental barriers to entry is resource ownership, the ownership and control over a critical input used in the production of a good. Limiting ownership of this input effectively limits entry into the corresponding industry. The petroleum industry provides an excellent example. If, for example, ten firms own and control all petroleum reserves world-wide, then the entry of an eleventh firm into the industry is extremely difficult.

To enter this industry, the eleventh firm must acquire ownership over petroleum resources. This could be accomplished in a couple of ways. (1) It could purchasing existing resources from any of the ten firms currently in the industry. An easy option, but if the original ten are unwilling to sell, then number eleven faces a sizeable enter barrier. (2) It could seek out as of yet undiscovered petroleum resources through exploration and drilling. The expense of such an endeavor also imposes a significant barrier to entry for firm number eleven.

Patents and Copyrights

In some cases a key productive input or even the output itself involves a patent or copyright. A patent is the exclusive right to use, sell, or market an invention for a specified period. In the United States, patents give inventors exclusive rights for a given number of years. A copyright is the exclusive right to reproduce, copy, and sell written materials. In the United States, copyrights also are awarded for a given number of years.

Patents and copyrights impose barriers to entry. If, for example, the Flex-Star Plaque Company holds a patent on Flex-Star Interactive Trophy Plaques, then other companies, such as OmniPlaque are prevented from producing trophy plaques using this patented technology. OmniPlaque, of course, might patent its own form of interactive trophy plaque, but the need to develop the technology and acquire a patent imposes a barrier to entry. And there is no guarantee that OmniPlaque will be able to develop a product or acquire a patent.

While copyrights work in much the same way, they tend to create less of a barrier to entry. A patent on the technology behind Flex-Star Interactive Trophy Plaques is a severe barrier to entry. In contrast, the copyright on a Brace Brickhead, Medical Detective novel is much less restrictive. Another author could write and copyright a similar detective novel about Chance Chesterfield, Super Sleuth. Each is a relatively close substitute for the other.

Government Restrictions

Government is the source of barriers to entry that are created by patents and copyrights. But these are not the only barriers to entry enabled by government. Government is, after all, the entity that establishes the rules of the game. It literally has the power to determine who can or cannot participate in a given market. If government says Merciless Monolithic Media Masters (the good folks of 4M) is the only company that can legally provide cable television services to the residents of Shady Valley, then 4M is the only legal participant in this market. Any other firm that seeks to provide residents of Shady Valley with cable television is breaking the law.

Governments frequently erect barriers to entry by legally limiting the number of participants in a market. Some of the more common examples are public utilities that provide cities with electricity, natural gas, telephone services, and garbage collection. Such legal restrictions for public utilities are usually designed to make the most effective use of natural monopoly markets that can create serious inefficiency problems.

Other legal restrictions, such as licenses or charters, are generally intended to pursue other goals, but create barriers to entry nonetheless. For example, many professions, including physicians, nurses, hair stylists, plumbers, and electricians, are licensed to maintain quality standards for consumers. However, they also create entry barriers.

Start-Up Cost

The previous three barriers to entry have a common theme, entering an industry can be costly. The barrier imposed by resource ownership can be overcome by incurring the cost of exploration and acquiring resources. The barrier imposed by patents can be overcome by undertaking expensive technological research and development. The barrier imposed by other government restrictions can be overcome by bribing government officials and/or acquiring the often expensive training needed for a license.

These point to a general barrier to entry--start-up cost. Three types of start-up cost comprises another important class of barriers.

  • One is the cost of acquiring productive capital. Many industries use a large amount of expensive capital, such as a factory. To be competitive with existing firms, a new entrant needs this capital. The more capital that is needed and the more expensive the capital is, then the higher the entry barrier.

  • A related start-up cost is initial operating losses generated by high average cost. If plant size and the large quantity of capital generate significant long-run economies of scale and/or short-run decreasing average total cost, then the existing firms with larger production quantities incur lower average cost than newer firms with smaller initial production quantities. The new entrant is likely to incur significant operating losses until it is established enough and produces enough to benefit from lower average cost.

  • Another start-up cost involves advertising and brand-name recognition. An industry with several well-established brand names forces a new entrant to spend a great deal on advertising just to reach an equal footing. Once again, this is a significant start-up cost that can limit the entry of new firms.


Recommended Citation:

BARRIERS TO ENTRY, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2022. [Accessed: October 1, 2022].

Check Out These Related Terms...

     | market control | price taker | price maker | product differentiation | market structures | market structure continuum |

Or For A Little Background...

     | perfect competition | perfect competition, characteristics | firm | industry | market | average total cost | average fixed cost | economies of scale | ownership and control | government functions |

And For Further Study...

     | monopoly | oligopoly | monopolistic competition | monopsony | oligopsony | monopsonistic competition | imperfect competition | perfect competition, efficiency | monopoly, efficiency | monopoly, characteristics | monopolistic competition, efficiency | monopolistic competition, characteristics | collusion, efficiency | oligopoly, characteristics |

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