Editing Barriers to entry (section)

===Porter's barriers to entry===

An article produced by [[Michael Porter]] in 2008 stated that new entrants to an industry have the desire to gain market share, and often substantial resources. The seriousness of the threat of entry depends on the barriers present and on the reaction from existing competitors.
Michael Porter's article shows 6 main sources of barriers to entry for entrants:<ref name=":0">{{Cite journal|last=Porter|first=Michael E.|author-link=Michael Porter|date=January 2008|title=The Five Competitive Forces That Shape Strategy|journal=[[Harvard Business Review]]|volume=86|issue=1|pages=78–137|pmid=18271320|url=https://hbr.org/2008/01/the-five-competitive-forces-that-shape-strategy|url-access=subscription|access-date=January 24, 2023}}</ref>

The first barrier to entry found in the article is the supply-side economies of scale. These scales arise when incumbents produce larger volumes of their product for a lower total cost. This can occur if they spread their fixed costs over more units, utilize a more efficient technology or are on better terms with their suppliers.

The second barrier to entry is the demand-side benefits of scale or network effects. According to Porters article, this arises when a buyer's willingness to pay for a company's product increases with the number of other buyers who also patronize the company. Essentially, through network effects the buyers may trust the larger companies more than smaller ones. This barrier discourages the entrant due to incumbent's embedded data and the structural adjustment programs made internally.

The third barrier is capital requirements for the initial investment and running of a company. Companies often require a large amount of capital when starting to pay for fixed facilities but also produce their inventory and fund start-up losses. The magnitude of the barrier increases if the capital is required for unrecoverable expenditure such as advertising and research and development.

The fourth barrier is incumbency advantages independent of size. For the incumbent, this barrier theoretically gives them a cost and quality advantage over the entrants. Specifically, these are often regarding proprietary technology, preferential access to raw materials, favourable geographic locations, established brand identities and even cumulative experience. This barrier more specifically outlines the favourable traits incumbents adopt over-time due to their established place in the industry, making it unavoidable for entrants in certain industries.
 
The fifth barrier is the unequal access to distribution channels between the incumbents and the entrants. Most companies require some type of distribution channel for the transport of their product. In the case where entrants cannot bypass this barrier, they end up forming their own distribution channel. The problem for entrants is that the more limited the wholesale and retail channels are, the more competitors have tied them up and consequently the more difficult entry into the industry will be.
 
The final barrier is restrictive government policy. Importantly, this barrier can either aid or hinder an entrant and even effect the other barriers. Restrictive government policies can block entrance through licensing requirements and restrictions on foreign investments. A clear example these may include the alcohol and taxi industries. Policies can heighten other entry barriers through patenting laws on technologies and even environmental and safety regulations that raise economies of scale for entrants.

Furthermore, a potential new market entrant's expectations about the reaction of the existing competitors within the industry will also be a contributing factor on their decision to enter the market.

An entrant may reconsider entering an industry or choose a new one altogether if incumbents have displayed conscious reactions to entrants in the past. Another discouraging indication for an entrant is if the incumbent is in possession of substantial resources to respond to an entrant. These resources generally consist of excess cash and unused borrowing power. This may also allow for incumbents to lower prices to either keep their market share or lower their excess capacity, another discouraging sign for an entrant.<ref>{{cite journal|last=Porter|first=Michael E.|author-link=Michael Porter|title=How Competitive Forces Shape Strategy|journal=[[Harvard Business Review]]|date=March–April 1979|volume=57|issue=2|pages=137–145|url=https://hbr.org/1979/03/how-competitive-forces-shape-strategy|url-access=subscription|access-date=January 24, 2023}}</ref>