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Barriers to Entry and Exit

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Market openness

Market openness is often referred to as the 'level playing field'. It can be characterized in the following ways:
Low entry barriers

The ability of new competitors to 'freely' enter a market.

more Low exit barriers

The ability of competitors to 'freely' leave a market.


Barriers to entry and exit are partly technological and partly socio-political. Of course, there are few if any markets where it would be appropriate or possible to altogether eliminate barriers to entry or exit. This is partly to do with the fact that operating in a market involves the acquisition of obligations.
Related notions of openness include technological openness and organizational/management openness more


In some industries, the important barrier is the exit one.  You shouldn’t be a bank or insurance company unless there is some guarantee that you aren’t going to suddenly quit.  (“This business has unexpectedly quit.”)

In some markets (for example, banking), one of the functions of industry regulation is to prevent players leaving the market without fulfilling existing obligations. This in turn may cause the regulator to restrict entry, only allowing those players whose untimely exit is improbable (or at least properly controllable).

In other markets (for example, IT), this regulatory function is performed by the companies themselves, in order to retain market respect. This is why, for example, IBM was for many years unable to withdraw commitment to the 360 architecture, or to the IMS database architecture. Such considerations in turn lead to entry inhibitions: a potentially high cost of exit may discourage entry into a high-risk market.

Note that self-regulation only works for those that want to remain in the game, it cannot provide effective barriers to exit.

However, those in the game can agree to set barriers for themselves.  (Ulysses and the Sirens).  There is a moral hazard here – why should any company want to unduly restrict their freedom of action?


Are there any reliable barriers to entry?  Or are most barriers like Hadrian’s Wall – delay and inconvenience, rather than serious obstacle?

Intelligent self-regulation has an advantage here.  If the insiders can keep changing the rules (or the interpretation of the rules, which comes to the same thing), a potential invader has to work twice as fast to breach the entry barrier.  However, this ignores one of the traditional invasion strategies: an ally on the inside.  When a closed market is faced with a threat from a notorious outsider, it is sometimes possible to muster enough solidarity to keep him out. (Unobtrusive threats rarely trigger as energetic a response.)  There are all sorts of games to be played here:
Provoking external threats in order to increase cohesion.
Provoking a threat in order to distract from a threat somewhere else.
Supporting or acquiring weak players, who might be vulnerable to external inducements.
Threatening sanctions on “traitors” (literally: those who trade with the enemy – but this assumes you know who the enemy is, and what counts as trading with him).

In some markets, these games can be openly discussed.  More often, the games – even the rules – are “above the ceiling”.  Lacking certainty or openness as to what is allowed and what is forbidden, some players will err on the side of caution, while others will err on the side of boldness.  Invaders are usually bolder than insiders; however, recent entrants may be more cautious than long-established players.

The market is refreshed both by actual and by threatened entry.  Thus from the perspective of the market as a whole, entry to the market should be selective – perhaps possible for strong companies (where strong means enterprising, well-resourced, and well-connected, among other things), and impossible for weak companies. Or perhaps possible for weak companies but only if they have something new or exciting to offer – after all, the weak ones can always be gobbled up by someone else.

Barrier to entry now transforms into unlevel playing field – a home advantage, if you like.  What is seriously worrying for many companies is that the legacy of old ways of thinking (embedded in people’s heads and working practices, as much as in computer software) means that there is a disadvantage to the established players, and the advantage goes to the new entrants.  Virgin Insurance and Direct Line are powerful competitors, precisely because they are not encumbered by the historical baggage of other insurance companies.  This advantage can be both real and perceived – thus there may be a brand advantage for a well-publicized new entrant.
more Competition
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This page last updated on November 15th, 2001
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