McCombs School of Business
Knowledge

Testing the Market
Barriers to Entry

Another important market concept to understand is barrier to entry, which can be valuable to an inventor because it protects them from competition. The meaning can be inferred by the title; a barrier to entry is some intellectual or physical barrier that makes it difficult or impossible for a person or company to sell a product or enter a market. For example, imagine that the start up cost of making a product is $1 million. This cost barrier can prevent many inventors and companies from developing this product. The cost acts as a barrier to entry.

There are many examples of these barriers; anything deterring competitors from entering the market is a barrier to entry. Patents offer a 20-year barrier to entry for any new product disclosed to the government. Once a product is patented, no other person or company can profit from the idea. Inventors can use their barrier to entry as a competitive advantage, therefore receiving payment for innovation.

Here are some good industry examples of barriers to entry:

  • Microsoft mogul Bill Gates has warned Latin American computer industry representatives that the lack of skilled labor may be the biggest trade barrier that the region needs to overcome to maintain economic development (Hall).
  • Microsoft has been found to be involved in predatory behavior using its monopoly power. There is a barrier to entry due to popular applications which allows Microsoft to charge more for its product (The Economist).
  • Incumbent firms in a given industry function as barriers to entry when they prevent some lower cost producers from entering the market by negotiating long-term contracts with buyers. Buyers gain transfer surplus from such contracts without affecting their current assets. These conditions indicate more entry as a greater cost. However, such long-term contracts actually define cost signaling with less market entry (Ziss).

Through these examples, it is easy to see that almost anything can serve as a barrier to entry. Whether a product is hard to develop, or there is a patent, or the upstart costs are too high, or labor in the workforce doesn't want to work, or the government isn't stable enough to support an economy, barriers to entry almost always exist. The important thing for an inventor to make sure of is that they are using these barriers as weapons of defense, not being shut out by them.


Paper outline

Check out the Silent Timer Web site to see the product Erik took to market. Contact him with any questions.

 

 
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