Market barrier

Market barriers , market barriers or often barriers to market entry and market exit barriers called hinder competitors at market launch - or - emerges . They provide a competitive advantage for already in the market active companies is because they discourage potential new competitors from entering the market. Market barriers therefore represent a certain obstacle for so-called newcomers . Critics argue that market barriers protect all competitors in an industry , but that competitive advantages are company-specific.

General

In a public market system there is competition between the individual providers who are represented in the respective market. As a central organizational principle of a market economy , competition means that as much service as possible should be produced, offered and demanded under certain competitive conditions. Barriers to market entry prevent competition because they restrict the conditions of competition.

history

The first economist to discuss the subject of market barriers was Joe S. Bain in 1962 . He defined the market entry barriers as follows: "To what extent can established companies increase their sales prices above the minimum average costs in the long term without potential market participants entering the industry?" Bain explains the height of the market entry barriers with the help of the limit price theory . The limit price theory describes the behavior of a monopoly . With its pricing policy , the latter aims at a price that should prevent other providers from entering the market.

Joe S. Bain's theory states that the monopolists or a group of oligopolists can determine the market price or the limit price by adjusting the supply quantity accordingly in such a way that it is unprofitable for potential new providers to enter the market. Another economist who researched barriers to entry was George Stigler in 1968. He defines barriers to entry not as the difference between the minimum average cost and the respective price, but as the difference in costs for a given production volume of an established company in the respective market against a company that appears as a potential competitor.

Franklin M. Fisher was another economist on the subject of market barriers. His definition was: "Barriers to market entry are anything that prevents market entry if it were socially beneficial."

Types of market barriers

Four types of market barriers can be distinguished: market entry barriers (prevent potential providers from entering), market exit barriers (prevent current providers from leaving), state market barriers and mobility barriers (prevent switching to other sub-markets). Markets without market barriers are called vulnerable markets .

There are two perspectives from which to view the market barriers:

1. Perspective: The perspective of those who want to penetrate the market, i.e. the so-called newcomers or new founders. It is important for them that the market barriers are as low as possible so that they have the chance to establish themselves in the respective market.

2nd perspective: The established providers, i.e. the defenders, see the whole thing a little differently. They want the highest possible market barriers that make it impossible for newcomers to enter the market as well. In some cases, they even try to raise the bar to make it even more difficult for others to enter the market. New providers are usually associated with a decline in sales for the established providers, as they can no longer maintain their previous contribution margins.

Barriers to entry

One distinguishes between:

Structural barriers to market entry
1. Advantages of differentiation
  : Advantages of differentiation are understood to mean, on the one hand, the buyer's preferences on the newly conquered market, and on the other hand, the superior design of the products compared to the newcomers. Another differentiating advantage of companies that are already active in the market are the already familiar sales channels. These sales channels can also lead to efficiency advantages.
  1. Buyer Preferences
  2. Superior design
  3. Distribution channels
  4. Goodwill

Behavior blocking entry: Behavior blocking entry is often understood as the strategy of limit pricing . Often one speaks in this context of the concept of the entry-preventing price. Assuming complete information and no irreversible costs , limit pricing makes no sense. Despite all this, the concept is very suitable as a strategic measure for companies that are already active in the market, as it reflects a signaling of the cost situation in the market under realistic assumptions of asymmetrical information. For potential new competitors, the low price level is a kind of signal effect, since they do not know the actual cost situation of the established companies. This blocking behavior has a strong strategic character.

Marginal price strategy for company size savings : If the unit costs of a product, a service or a function decrease with an increasing absolute quantity per unit of time, one speaks in this case of a company size saving. Newcomers entering the market would have to enter the market either with high production volumes or with low product volumes. Too high a production volume, however, requires a lot of capital, but if it is too small, it can be the case that you produce too expensive yourself. The marginal price strategy for company size savings is the savings that the provider has due to his production volume and company size.

Marginal price strategy with absolute cost advantages: This type of cost advantage is one of the most important in the competition between small and medium-sized companies. This means the superior production methods compared to other providers. A certain amount of experience on the part of companies means that their processes run optimally, that their machines are used to a high degree and that the employees produce few rejects. This makes production more cost-effective for the company. It is difficult for the newcomers to exploit all potential immediately when entering the market, as they have little or no experience.

Marginal price strategy for differentiation advantages : Differentiation advantages are understood to mean that the established providers have already built up a certain brand awareness among consumers. A company with certain differentiation advantages sets itself apart from the other companies active in the market.

Strategic market entry barriers: The big difference to the first point of the structural market entry barriers is that the strategic barriers are built very consciously by the established providers, while the structural ones tend to be unconsciously. Strategic barriers to market entry are barriers that serve to keep newcomers away from the market in the long term .

Threat of retaliation
1. Before entering the market
  1. Signaling approach: With this approach, companies try to limit their information. The established providers, for example, control the information about the production of their products in such a way that newcomers cannot establish themselves on the market. Either they make this information so complex that the newcomers are put off in the first place, or they make the information too simple so that the newcomers in the market fail immediately if they occur.
  2. Commitment approach: With the commitment approach, companies try to create a bond with the customer to the company. You are trying to prevent the customer from switching to another competitor.
2. During market entry (reputation approach): Reputation is about how a company is perceived by others in terms of past and future aspects. With a positive reputation, the respective company value increases. In order to achieve a positive reputation, four dimensions should be considered.
  1. credibility
  2. reliability
  3. trustworthiness
  4. responsibility
Raising Rival's Costs: The attempt is made to raise prices for other competitors and competitors so that they have to pay higher costs in order to provide the same or a similar service. In other words, you deter your competitors by increasing your costs.

High market exit barriers: These can also represent a high market entry barrier. If there are no high market exit barriers in a market, this can lead to large companies entering a market and trying to shock it with a low-price strategy, thereby trying to force others out of the market. Such companies are mainly companies that have strategic interests in ruining a market, weakening it or siphoning off short-term profits. These companies are now deterred by the high market exit barriers. Since the investments that were necessary when entering the market remain sunk costs when leaving the market.

Endogenous barriers to market entry: One intervenes endogenously in markets if one tries to improve customer loyalty or customer acquisition. This is often associated with high investments in these areas.

In addition to structural market entry barriers ( savings in company size , absolute cost advantages, differentiation advantages), a distinction must be made between entry-blocking behavior ( limit pricing ), strategic market barriers and market exit barriers. The limit pricing is dependent on the existence of specific structural market entry barriers. In the case of company size savings ( economies of scale , network effects , density advantages ), the entry-blocking price is obtained where the remaining demand for the newcomer does not cover costs ; In the case of absolute cost advantages, the price must be set so that the average cost curve of potential newcomers is always above the established ones; In the case of differentiation advantages, the price-sales function of the newcomer is such that it generally has to undercut the established ones.

Exit barriers

According to Michael E. Porter , market exit barriers are economic, strategic or emotional factors. They prevent companies that have low or even negative rates of return from simply leaving the respective market. In other words, they make it difficult to completely withdraw from the market. Barriers to exit from the market mainly exist when companies that are no longer competitive are active on the market, as excess capacities are not reduced. Market exit barriers mean that certain industries cannot consolidate. Market exit barriers arise mainly from fixed, short-term, non-degradable costs. These arise from the irreversibility of long-term, past expenses.

This type of market barrier is less important for newcomers , but all the more important for established companies that want to exit. However, they are not to be ignored completely for the newcomers. If your market entry does not work as desired, or you cannot assert yourself on the market, this point also plays a certain role in the risk assessment .

Exit barriers (. Engl barriers to exit ) can be divided into:

Sunk costs ( sunk costs ): Due to a high already made investment ( capital commitment ) that can not be converted into another type of use, a market outlet is only possible with considerable losses (the investment already made). The costs for leaving the market have thus fallen. These are expenses that cannot be recovered. The reason for this are costly decisions that can no longer be reversed. Civil engineering costs for laying telecommunication lines in the fixed network area are traditionally sunk costs. Sunk costs can also arise from advertising or product research. Non-tradable UMTS licenses or highly specialized production lines that no one else can use are further examples.
Strategic interrelationships ( strategic groups ): Strategic interrelationships are also known as strategic groups. This exit barrier applies to almost all companies that have been active in the respective market for a long time. Companies that have been in the market for a long time have a very large network of business contacts. This also makes it more difficult for newcomers to enter the market, as they first have to build up a network of business contacts. A strategic group is a group of companies within an industry. The members of this group have similar organizational structures or similar competitive strategies. In other words, they are all trying to follow the same strategy. Michael E. Porter set up various dimensions with which this behavior can be measured:
- Pricing policy
- Product quality
- Service: Established companies on the market that focus on strategic interrelationships invest in creating mobility barriers. These also prevent competitors from entering the market. The market participants cooperate with one another in strategic groups. The reason for their cooperation is the potential for returns. With a small number of competitors in the market, more is left for each individual market participant. Example: Breweries grow their own yeast and do not purchase it from a third party. So it may be that there is no longer an external supplier for yeast and new suppliers who want to enter the brewery market make it more difficult to enter the market.
Emotional barriers: It is not easy for any company to act without emotions . In other words, they do not make their decisions completely rationally, but let their feelings guide them. Instinct and experience play a major role in this. This can lead to the managing director campaigning for the company to remain, although objectively everything speaks against the company remaining on the market. It is also often the case that companies cannot admit that they have failed.
Administrative and social restrictions
1. Loss of image : e.g. B. If a company wants to withdraw from the production of a product, this can lead to a loss of image for the entire product range.
2. State intervention: e.g. B. Subsidies that are linked to certain conditions and make it impossible to exit the market. The state tries to prevent misallocations in the market.

Market exit barriers lead to overcapacities in markets that are characterized by a decline in demand, since companies in the market do not adjust their capacities or only slowly adjust their capacities or leave the market. Another consequence of exit barriers is often ruinous cutthroat competition , as none of the companies can afford to exit the market and tries to force the others out of the market.

Barriers to market exit can also represent barriers to market entry, as they prevent a hit-and-run strategy aimed at quickly absorbing profits .

State market barriers

In addition to the above, state intervention in markets such as concessions or subsidies can lead to restricted market access.

Mobility barriers

Here are resources to distinguish which completely immobile are (perfectly immobile), and those that incomplete mobile are (imperfectly mobile). Completely immobile resources can not be traded, the property rights (property rights) are not fully specified. Complete specification is problematic for intangible and idiosyncratic resources (resources that can only be used within a company).

Incompletely mobile resources can be traded, but have a higher value within the company than on the market. This applies to the following types of resources:

Company-specific investments, e.g. through the acquisition of company-specific knowledge by employees,

Resources, the transfer of which causes exorbitant transaction costs,

Co-specialized assets: These resources can either only be shared with other resources, or they have a higher economic value if they are shared with other resources.

Absence of market barriers

A market where there are no barriers, i. H. where there is unhindered entry and exit is called a contestable market .

Five Forces according to Porter

In 1980 Michael E. Porter developed a certain five-force model , also known as the Five Forces. The five forces model is an industry structure analysis . It is often mentioned in connection with the barriers to entry. His model is based on the normative assumption that the strategy of a market participant must be based on his or her respective environment in order to be successful in the long term. Porter developed the idea of the 5 forces that act in every market and determine the strength of a supplier in the market.

The 5 forces are:

Rivalry between existing companies
Bargaining power of the suppliers
Bargaining power of customers
New competitors enter the market
Threat from substituted products or services

The main focus here is on competition among existing competitors. However, this aspect does not play a role in the barriers to market entry. The subject of new competitors / market partners entering the market is all the more important because, as already mentioned, the barriers to market entry are intended to prevent this. Porter says that if it turns out that there is money to be made from a certain product or niche, it can lead to imitators very quickly. The problem here is that the new suppliers can offer their products at lower prices, as they often do not have to bear any research and development costs. This means that in a competition analysis or a competition analysis, attention should also be paid to the existing entry and exit barriers.

Individual evidence

^ ^A ^b Sarah Wolff: Disaggregated public service provision between self-production and competition . Ed .: Technical University of Braunschweig. Springer Gabler, Wiesbaden, ISBN 978-3-658-03655-3 .

^ Joe S. Bain, Barriers to New Competition , 1962, p. 3

↑ ^a ^b ^c Barbarar Stauder: Market entry strategies for the EU . Diplomica Verlag, 2005, ISBN 978-3-8324-8912-0 .

↑ Jörg Borrmann; Jörg Finsinger; Klaus Zauner: Regulation, Competition and Market Economy . Ed .: Hans G. Nutzinger. Vandenhoeck & Ruprecht, Göttingen 2003, ISBN 3-525-13236-0 , pp. 123-150 .

↑ ^a ^b Axel Schröder: Barriers to market entry - everything you need to know. Retrieved December 15, 2016 .

↑ Hartmut Berg: Competition Policy . In: Vahlens Compendium of Economic Theory and Economic Policy. Volume 2. , 7th edition, Vahlen-Verlag, Munich 1999, ISBN 3-8006-2382-X , p. 304

↑ Axel Schröder: Barriers to leaving the market or why unprofitable companies remain in the market. Retrieved December 15, 2016 .

^ F. Schmitz, M. Papenhoff: The pulmonologist . Springer Gabler, Wiesbaden 2012.

↑ Axel Schröder: The 5 competitive forces according to Porter - basics for competition analysis. Retrieved January 13, 2019 .

[:0-1] A ^b Sarah Wolff: Disaggregated public service provision between self-production and competition . Ed .: Technical University of Braunschweig. Springer Gabler, Wiesbaden, ISBN 978-3-658-03655-3 .

[2] Joe S. Bain, Barriers to New Competition , 1962, p. 3