I am confused by barriers to entry - can someone please explain what these are and why they are significant?

Answer 1

Barriers to entry explain how easy or how difficult it is for entrepreneurs to start certain types of new businesses.

Imagine you wanted to be a hot dog seller in New York City. You apply for a license for a small fee and then you can take a fold up table, a bag of rolls, a small gas heater, and a plate of hotdogs and begin selling them to the public. There is almost nothing preventing you other the time and effort you are willing to put in. The costs are minimal, and no one is trying to stop you.

Now imagine you wanted to set up your own search engine company to rival Google. You would need billions in start up capital to build a technology infrastructure, you would need technical expertise which you may not have, and no one would likely be willing to lend you the money as you might be considered too much of a risk to invest in!

The hot dog seller is an example of an industry with low barriers to entry, which we see in perfectly competitive markets. And the search engine example is where there are high barriers to entry such as high costs and a lack of knowledge or technical expertise which we will see more in imperfectly competitive markets such as Oligopoly and Monopoly.