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Barriers to entry are obstacles or impediments that make it difficult for new companies to enter a particular market, even when incumbent companies are making excessive profits. Barriers to entry may include technological factors, consumer loyalty to existing products, government regulations, patents, amongst other factors.
By protecting incumbent companies, barriers to entry restrict competition in a market and may contribute to price distortion. These barriers often cause or contribute to the existence of monopolies and oligopolies, or confer companies greater market power.
Since the 1950s, several definitions of barriers to entry have been proposed, and there has been no clear consensus on what barriers to entry consist of.
For instance, economist Joe S. Bain defines barriers to entry as an advantage of established sellers in an industry over potential entrants sellers, reflected in the extent to which established sellers can persistently raise their prices above competitive levels without attracting new entrants into the industry (Bain, 1956).
This definition is broad and considers economies of scale and capital investments as barriers to entry since they are positively correlated with high profits. Bain’s definition has been criticized for being tautological, since it incorporates the consequences of the definition into the definition itself. In addition, there may be a market with competitive prices due to the presence of many companies, but with no possibility of entry, for example, due to a government regulation. Yet this market would have no barriers to entry according to Bain’s definition.
On the other hand, George J. Stigler has defined barriers to entry as a production cost that must be borne by a company seeking to enter an industry but is not borne by companies already in that industry (Stigler, 1968).
Stigler’s definition avoids tautology by identifying a barrier to entry in terms of its fundamental characteristics, emphasizing the differential costs between incumbents and entrants. However, there has been debate on whether his definition includes costs that established firms do not currently incur or costs that these firms have never incurred.
Stigler’s definition is narrower than Bain’s. Some costs are barriers according to Bain, but not according to Stigler; however, all of Stigler’s barriers fit within Bain’s definition.
Furthermore, other definitions have been proposed, but none of them has emerged as a clear favorite. Given that the debate remains unresolved, but the various definitions continue to be used as analytical tools, the possibility of confusion —and therefore of misguided competition policy— has persisted for many years.
In light of this disagreement, some experts argue that the exact definition of barriers to entry is irrelevant to competition policy and that what really matters in competition cases is whether entry is likely to occur, when it will occur, and to what extent.
Regardless, it is undeniable that the concept of barriers to entry is fundamental in antitrust matters, as it is vital for the analysis of market power. Barriers to entry may delay, reduce, or completely prevent the usual mechanism that disciplines companies with market power: the threat of the arrival of new competitors.
Barriers to entry can be classified into three main groups: natural or structural barriers, artificial or strategic barriers, and legal barriers.
Structural barriers to entry arise from the basic characteristics of the sector, such as technology, costs, and demand. These natural barriers sometimes create natural monopolies. Some examples are:
Strategic barriers arise from the behavior of established companies, which may increase structural barriers, create new barriers, or threaten new competitors through different means. These artificial obstacles reduce the likelihood of market entry, since potential entrants perceive that there is no benefit in entering the market. Some examples are:
Regulatory barriers are rules issued by the authorities that prevent or hinder the entry of new firms into a market. They include laws and regulations, as well as the State’s industrial policy. Both originate from a country’s authorities but differ in terms of their duration. If they are laws, they tend to have a long duration, whereas if they are administrative or economic policies, they can be adjusted relatively quickly depending on the general environment.
These barriers may have different effects on different types of entrants. For example, it may occur that a foreign company faces greater barriers to entry when attempting to establish itself in a national industrial sector, compared to domestic companies seeking to enter the same sector.
There are many sources of legal barriers to entry, including:
Barriers to entry are relevant in the analysis of virtually all types of competition cases that are not per se offenses, such as participation in a hard-core cartel.
For example, in the case of a merger, if the authorities oppose the transaction or determine that certain mitigation measures are necessary, they will have to demonstrate that barriers to entry make rapid and significant entry by new companies unlikely. Similarly, for a case of monopolization or abuse of a dominant position, it is necessary to establish the presence of substantial barriers to entry, beyond a high market share.
However, the analysis does not end with the existence (or absence) of barriers to entry. The fact that entry by an actor is likely in a market will not necessarily resolve competition problems. For example, there may be a collusive agreement and free entry at the same time. It may also occur that the expected entry fails to reverse the harmful effects of the challenged conduct or transaction.
Moreover, the absence of barriers to entry does not guarantee market entry, nor is the number of firms a reliable indicator of the existence or absence of such barriers.
For this reason —although it depends on the criteria of each jurisdiction— it is often said that the study of market entry conditions should focus on determining whether the entry of one or more competitors is likely, timely, and sufficient to counteract potential competition problems.
The costs of starting or expanding a business depend heavily on the degree of irreversibility and magnitude of the investments that must be made to operate in the industry. If investments are reversible and/or can be allocated to other uses, the opportunity cost of investments decreases, since the factors of production can be associated with alternative uses.
This reduces risk and encourages the entry of new competitors, so barriers to exit are closely related to barriers to entry in an industry. The greater the barriers to exit, the greater the barriers to entry.
The concept of a “contestable market” was introduced by economists William Baumol, John Panzar, and Robert Willig in 1982. These markets are characterized by exhibiting optimal behavior, similar to perfectly competitive markets, but across a wider range of industrial structures — even including monopolies and oligopolies— due to the threat of potential competition.
A market is perfectly contestable if it satisfies three conditions:
A market that meets these conditions does not present barriers to entry. In a contestable market, the incumbent company in a monopoly or oligopoly situation will not charge prices above its marginal cost. If the established company charged a higher price, a new company could enter the market, charge a slightly lower price, take away the incumbent’s profits, and exit the market before the established company could adjust its prices (“hit and run” strategy). Faced with this threat, the monopolistic or oligopolistic company has no choice but to take measures which bring it closer to a state of perfect competition, which causes its monopolistic market power to be significantly reduced or “disciplined”.
Perfectly contestable markets are not easily found in the real world, nor are perfectly competitive markets.
According to Baumol (1982), perfect contestability does not primarily serve as a description of reality, but rather as a benchmark for reality that refers to a desirable industrial organization that is much more flexible and with a broader scope of application than what we had before.
Among the criticisms of this theory, it is often argued that it the theory is based from two erroneous assumptions (Motta, 2004). The first is the assumption that the monopolist will be unable to react on its own to potential challengers by modifying its own price. The second mistaken premise is to imagine a world where there are no sunk costs for new entrants, since new investments will always be required to enter a new activity.
Despite these concerns, the contestable market theory has influenced the opinions and methods of regulators. Barriers to entry and exit, rather than the concentration or size of companies, may be the main source of interference with the proper functioning of a market.
On the other hand, opening a market to potential participants can be an effective method of promoting efficiency and deterring anti-competitive behavior. For example, regulators may require incumbent operators to open their infrastructure to potential entrants or to share technology, a common approach in the telecommunications industries, where incumbent operators are likely to have significant market power in terms of network control.
The analysis of barriers to entry is highly relevant in cases of unilateral conduct (whether abuse of a dominant position in the EU or monopolization in the US). Indeed, one of the requirements for establishing this type of infringement is the high market power wielded by the party engaging in the conduct. In this regard, while market share serves as a proxy to demonstrate such power, it is also necessary to explain why that high market share is maintained over time. This is where barriers to entry come in.
A good example of this is the case US v. Google, decided in 2025 by the Eastern District Court of Virginia (see CeCo note). In that case, the judge found that Google’s power in the digital advertising market was not only evident in its high market share (which in some segments was greater than 90%), but also in the high barriers to entry in the industry. In this regard, the court explained in its decision that courts are more willing to infer monopoly power from high market share when there are high barriers to entry because the true measure of monopoly power lies not in a firm’s high market share, but in its ability to maintain that share (p. 72).
The barriers identified were of structural nature, particularly network effects and economies of scale, and of artificial nature, such as high switching costs. Regarding structural barriers, it was estimated that software (such as platforms) for managing demand for digital advertising space increases in value as more customers are acquired on both sides of the platform (cross-network effects). In addition, the development of this type of software has high fixed costs in terms of development and data collection, but the marginal cost of administering the already developed software is low (economies of scale). On the other hand, regarding switching costs, the court found that, in practice, customers in this market (publishers and advertisers) prefer not to use more than one platform to manage their advertising supply and demand. In fact, as an executive from this industry mentioned before the court, switching from one ad server to another is like changing the wheels on a car in the middle of a race (judgment, p. 74).
A problematic aspect for free competition in the context of public tenders is the way in which the evaluation of bids submitted by applicant firms is regulated in the tender specifications. If the tender specifications establish very high requirements of “experience” or economic capacity as conditions for participation, this is likely to benefit market incumbents (companies that have already won previous bids) and, at the same time, operate as barriers to entry—of a regulatory nature—for other agents wishing to participate in the tender.
This issue was analyzed by the Tribunal de Defensa de la Libre Competencia (TDLC) in General Instruction No. 6/2025 on rules for municipal public works tenders. In its decision, the TDLC distinguished two types of evaluation factors: “static” and “variable.” The former are those that bidding firms cannot modify at the time of submitting their bids, such as their economic capacity, experience, and presence in a specific geographic area. The latter are those that firms can decide at the time of submitting their bids, typically the price or fee offered for the tendered contract.
In this context, the TDLC reasoned that: “a high weighting of static factors generates an advantage that reduces the competitive intensity of the tender, which may discourage the participation of suitable bidders, which can become an insurmountable barrier to entry” (para. 90º).
In this manner, when analyzing the case and statistics on municipal works tenders, the TDLC found that the price factor was weighted on average at only 32% of the total tender score. Thus, even if the company submitted a very competitive price, it was disadvantaged by the (over)weighting of fixed factors, especially experience and economic capacity. To correct this problem, the TDLC ordered in its instruction that tenders must be carried out in two stages, one for the qualification of bidders and another where the price must account for at least 80% of the score considered to adjudicate the tender (that is, it must be the most important factor).
In addition, the TDLC considered that the potential risk that the awarded company (which offered the best price) might not be able to fulfill the contract could be mitigated by requiring guarantees of faithful performance of the contract. However, it also pointed out that these guarantees cannot exceed the value of the economic damage that could be caused by a breach or the risks that are sought to be prevented (otherwise, they would also act as barriers to entry for participation in the tender).
