Definition of Barriers to Entry

In the FCA's Merger Guidelines, a Barrier to Entry is defined as the probability and extent to which potential competition hinders the ability of the incumbent to compete with other market players to a greater or lesser extent. The FCA's statement in the Merger Guidelines - arguably influenced by its view that Barrier to Entry is those which reduce competition - also applies to abuse of dominant position situations. The Finnish competition law defines a Barrier to Entry as an impediment to entry that has an effect on the constraining effect of potential competition.

Barriers to Entry

There are three types of Barriers to Entry identified in the Merger Guidelines: technical, economic, and legal. Intellectual property rights, production quotas set by the government, licenses, and type approvals are some of the legal Barriers to Entry. The high costs of entering or exiting the market, particularly in comparison to the expected revenues, maybe an economic Barrier to Entry. It is assumed that entry will be likely if revenues are expected to be high. A threat of utilizing excess capacity, lack of distribution channels and supply sources, and joint ventures between suppliers and customers are other economic Barriers to Entry. Economies of scale and scope, production processes, and innovations can be considered technical Barriers to Entry.

As a rule of thumb, the Barrier to Entry is high if the volume needed to achieve the economies of scope possessed by the incumbents is high. It is also possible for conglomerates and vertically integrated firms to have technical Barriers to Entry through economies of scale. For companies that operate at multiple levels of market integration, Barrier to Entry can be caused by the need to enter the market in parallel, or by the difficulty of operating at just one level of market integration. It is not required that, as a consequence of Barrier to Entry, an entry be completely foreclosed in the competition law enforcement practice in Finland.

In this regard, Barrier to Entry may serve as evidence of the incumbents' ability to prevent competitors from gaining a competitively significant market position. 

If entry costs are significant and don't influence the behavior of existing firms, they are assessed in order to prevent entry. In the Merger Guidelines, it is acknowledged that the importance of Barriers to Entry varies in different markets and at different stages of the market cycle. Sometimes, a single factor can factor into the success of a market, e.g. the scarcity of raw materials, technology, or strong brands. An entrant's market position and previous entry into a market are taken into consideration when assessing the significance of Barrier to Entry. While assessing Barrier to Entry, the FCA also takes into account Barrier to Entry, according to the Merger Guidelines. As a result of exiting the market, exit costs become a Barrier to Entry. If entry costs are high and investments related to these costs cannot be exploited in other businesses, even a minor risk of failure may deter entry. 

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