The Five Types of Artificial Barriers to Entry

Artificial barriers to entry help incumbent firms maintain market power by limiting competition. They are common in monopolistic and oligopolistic markets, preventing smaller firms from challenging dominant players.

Five Key Artificial Barriers to Entry:

Predatory Pricing

Incumbent firms set prices extremely low, often below cost, to drive new entrants out of the market. Once competition is eliminated, they raise prices again.
Example: Amazon has been accused of temporary price undercutting in certain sectors to weaken smaller competitors.

Limit Pricing

Firms set prices just low enough to discourage new entrants from entering, making the market unprofitable for potential competitors.
Unlike predatory pricing, this strategy is sustained over time.
Example: Large supermarket chains set low but profitable prices to prevent small retailers from competing.

Exclusive Contracts and Loyalty Schemes

Dominant firms sign exclusive agreements with suppliers or retailers, blocking access for new firms.
Loyalty schemes also lock in consumers, making it difficult for competitors to gain market share.
Example: Google was fined by the EU for restricting Android manufacturers from pre-installing rival search engines.

High Advertising and Branding Costs

Large firms invest heavily in brand recognition and advertising, making it difficult for new entrants to compete on visibility and customer loyalty.
Example: Coca-Cola and Pepsi dominate the soft drinks market through global marketing campaigns and sponsorships, limiting new competitors' ability to attract consumers.

Intellectual Property (Patents and Trademarks)

Firms use patents, copyrights, and trademarks to legally prevent new firms from producing similar products. This creates a temporary monopoly until the patents expire.
Example: Pharmaceutical companies use patents to maintain high drug prices and prevent generic competition.