George J. Stigler won an Alfred Nobel Prize in 1982 for his work in economics sciences, and his thoughts on barriers to entry have been shaping marketing ever since. Barriers to entry are obstacles or areas that block the path of a company who is attempting to enter a market.
For those of us who either slept through marketing economics, or it has blurred together between not sleeping and partying, I think a little refresher is in order. This is just a brief overview of barriers to market entry, so let us not over examine it.
Barriers protect firms who are competing in a market, by keeping newcomers out. They are also key to a company’s pricing power, giving a company the ability to raise or lower prices without losing customers.
Common types of barriers include: Advertising, Control of resources, Customer loyalty, Economies of scale, Distributor agreements, Government regulations, Inelastic demand, Intellectual property, Network effect, Predatory pricing, Research and development, Sunk costs and Vertical integration.
- High entry barriers have very few players, creating higher profits.
- Low entry barriers have many players, creating lower profits.
- Markets with high exit barriers are seen as unstable, causing profits to fluctuate.
- Markets with low exit barriers are more self-regulated, and profits do not fluctuate as much.
There are also four general types of competition that relate to these theories:
- Perfect competition: Almost no entry barriers
- Monopolistic competition: Low entry barriers
- Oligopoly: High entry barriers
- Monopoly: Extremely High, almost Absolute entry barriers
So what does it all mean?
Simply, that if you think about things before you act then you’re twice as likely to accomplish your goals. But more importantly, there are many things that you should consider before launching a product into a new market. And as always, I have a quick example from my school days.
Example: Nike Air Jordans are for Gods
I remember, only slightly, reviewing case studies relating to missing the mark with product launches. One such case study that has always stuck with me is the case of Nike vs. CAIR. The article revolved around how Nike, in 1997-98 was force to recall 800,000 shoes because they had almost directly translated the word “Air” into “Allah.” This is probably one of the best cases of how a company must be aware of cultural differences when entering a new market, and how different cultures now play into market entrance.