(1) entry barrier
1) The meaning of entry barriers
In industrial organizations, there are two definitions of entry barriers. Bain pointed out in his book "Barriers to Entry" that "Barriers to Entry are the advantages that incumbent enterprises have over potential entrants in this industry, so that incumbent enterprises can continuously raise prices to the lowest average production and sales costs without causing new enterprises to enter this industry." [ 1]
From another point of view, entry barriers also refer to the unfavorable obstacles that potential enterprises or new enterprises encounter in the competition with the original enterprises. Stigler believes that when new enterprises seek to enter an industry, the barriers to entry are higher than the production costs of existing enterprises. [2] This definition emphasizes that enterprises in the industry enjoy cost advantages over those seeking to enter, which is also the basis for the incumbent enterprises to obtain long-term economic profits.
Wang Junhao, a Chinese scholar, defined the entry barrier in his Industrial Economics, that is, the factors that make it difficult for entrants to successfully enter an industry, and at the same time enable the incumbent enterprises to continuously obtain excess profits and maintain a high concentration of the whole industry. He divided entry barriers into two categories: structural entry barriers and strategic entry barriers. [3] This is the definition and classification adopted in this book.
2) Structural barriers to entry
The structural factors that constitute barriers to entry mainly include economies of scale, absolute cost advantages, product differentiation, necessary capital, policies and legal systems.
(1) economic barriers to scale. Scale economy means that the average cost of enterprise production decreases with the increase of output. According to the law of economies of scale, only after gaining a certain market share can new enterprises gain economies of scale in production and sales. Prior to this, the production and sales costs of the new enterprise must be higher than that of the original enterprise, thus being at a competitive disadvantage. Under the premise of limited market demand and economies of scale, one or a few enterprises produce with the smallest effective scale and obtain economic profits. If new enterprises enter with the same output, all enterprises may lose money. At this time, new enterprises will not be profitable when they enter this industry, and economies of scale will become barriers to entry.
② Absolute cost advantage barrier. Absolute cost advantage means that at any output level, the average cost of the original enterprise is lower than that of the potential entrants, which makes the potential enterprises or new entrants at a competitive disadvantage compared with the original enterprises. The original enterprise has prevented the entry of potential entrants while gaining economic profits, and the cost advantage of the original enterprise constitutes the entry barrier. The absolute cost advantage of the original enterprise may come from the following factors [4]:
First, the original enterprise controls the latest production technology through patents or technical secrets;
Second, the original enterprise may control the supply channels of high-quality or low-price inputs;
Third, the original enterprise may control the sales channels of products;
Fourth, talents with special management ability and other technical expertise in the original enterprise;
Fifth, entry enterprises may have to pay higher capital costs when raising entry funds.
The absolute cost advantage barrier makes the production cost of new enterprises always higher than that of the original enterprises when they enter the market.
③ barriers to product differentiation. In the industry market with high degree of product differentiation, product differentiation is often a more important factor that constitutes entry barriers. The original enterprise has established a certain brand awareness and reputation through long-term product differentiation efforts. On the premise of ensuring quality, customers can maintain their loyalty to products only through a small amount of advertising investment. However, if a new enterprise wants to convince customers that its products are superior to the old enterprise, it will pay a high price, which will inevitably increase the production and sales costs of the new enterprise. The more obvious this cost disadvantage is, the higher the entry barrier caused by product differentiation of old enterprises. Of course, if new enterprises master new technologies that can eliminate the products provided by old enterprises, the entry threshold will be much lower. [5]
④ Obstacles to necessary capital. Necessary capital refers to the capital that potential entrants must invest in order to enter an industrial market, and the resulting entry barriers are called necessary capital barriers, also known as capital requirement barriers. In different industries, the necessary capital varies greatly with the basic characteristics of technology, production and sales. The higher the capital intensity of the production process, the greater the required capital, the more difficult it is for a new enterprise to raise funds, and its capital cost is higher than that of the original enterprise. Therefore, the more difficult it is for new enterprises to enter the market, the greater the barriers.
(5) policy and legal system obstacles. In some countries and industries, enterprises sometimes need to go through complicated approval procedures to carry out business. The purchase of foreign technology, equipment and raw materials must be approved and issued, and the production of some products is subject to a licensing system. The fund-raising should be restricted by policies, and the patent and intellectual property protection system can become legal system barriers when new enterprises enter. This barrier is difficult to overcome by reducing costs or increasing advertising fees.
3) strategic entry barriers
Strategic behavior is the behavior of enterprises in oligopoly market to change the competitive environment by investing in resources that affect competitors. With the continuous improvement of market concentration, oligopoly market has increasingly become the dominant market structure. Strategic entry barrier is the entry barrier set by incumbent enterprises through their strategic behavior. For example, enterprises can lobby the government to change laws and policies through strong economic strength, change the technical characteristics of the industry through strong R&D capabilities, change consumers' preferences through large-scale advertising, and make entrants at a cost disadvantage in the oligopoly market structure through investment in excess capacity. Therefore, with the evolution of market structure, strategic barriers to entry have increasingly become the dominant form.
4) Measurement of entry barriers [6]
The first is descriptive indicators. According to the proportion of economic scale to the total market size, necessary capital, product differentiation, absolute cost, the number of licensed patents of industries and enterprises, transactions and approvals, the entry barriers of industrial markets are calculated.
The second is to prevent the acquisition of price indicators. The level of entry barriers in a particular industry can be measured by the percentage of the highest entry price in the industry higher than the average cost of the industry. The maximum entry prevention price refers to the highest price that can prevent new enterprises from entering. When enterprises set the price at the price level of maximizing profits under complete monopoly, new enterprises still cannot or have no intention to enter this market, so the barriers to entry in this industrial market are very high; If the price set by the enterprise is slightly higher than the competitive price level under the condition of perfect competition, and it can effectively prevent new enterprises from entering, then the entry barrier of this industrial market is very low.