Entry of firms into a market is an important mechanism in the economy. Entrants have an equilibrating function. Firms will enter the market if the profit level is above the long-run competitive level. As a result of entry, the profit level will decrease to the long-run competitive level. Entrants are also important agents of change. Firms with new ideas or production processes will enter the market. Thus these two effects of entry contribute to allocative as well as to dynamic efficiency in the market. However, several mechanisms can prevent firms from entering the market. In other words, there can be barriers to entry that harm the allocative and dynamic efficiency and are therefore detrimental for industry dynamics and economic welfare. From this perspective, it is clear that lowering barriers to entry or preventing that these barriers are created is an important issue in competition policy. In this report, we identify different barriers to entry and discuss the mechanisms behind these barriers. The central research question is:

Which barriers to entry exist, how do they work and to what extent is the mechanism influenced by the size of the (potential) entrant?

The report is based on two different literature traditions, industrial organisation and strategic management. Barriers to entry in the industrial-organisation literature go back to Bain (1956). He focused on the consequences of the barriers to entry, i.e. a higher price than the price hypothetically attributed to long-run equilibrium in pure competition. If the most efficient entrant of all potential entrants cannot enter the market, then there is said to be a barrier to entry. The barriers are based on structural aspects of the market and behaviour of the incumbents to influence the conditions of entry. The structural conditions permit incumbents to raise the price above the minimum average cost of potential entrants. A slightly different perspective in the industrial-organisation literature (Chicago school) is to look at the costs that must be borne by an entrant to a market that need not to be borne by an incumbent already operating in the market (asymmetry of costs). This implies that the incumbents and entrants are not equally efficient after the costs of entering are taken into account (i.e., the conditions for entering for the incumbents were less difficult than for later entrants).

In strategic-management literature, one tries to explain (and prescribe) the behaviour of individual companies that pursue maximal profit and other organisational goals. In pursuing these goals, companies interact with their environment (competitors, stakeholders, government, etc). This interaction influences the final profit of the individual company and industry as a whole. There are different strategies and tactics that companies can use to sustain their position. Examples of these strategies and tactics are raising structural barriers (e.g., blocking access to distribution channels) and increasing expectations about retaliation (signal commitment to defend). An important author in this line of thinking is Porter (1980, 1985).

Based on the two literature traditions, we identified 37 distinct barriers to entry. For each barrier, we give a short description in which the mechanism how the barrier works is discussed. There is a discussion on the possible size effect related to the barrier, the sustainability of the barrier (what can the incumbent do to sustain the barrier and the entrant to avoid the barrier). Finally, we discuss for each barrier if they are related to other barriers and how they are measured in empirical studies. The report is ended with a synthesis in which the barriers are evaluated on the impact of size on the barrier and to what extent the barriers can be influenced by SMEs, large enterprises or the government. It proves that especially incumbents and the government can influence a lot of barriers to entry. SMEs are to a larger extent than large firms influenced by the existence of barriers to entry.

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