A Practical Method for Diagnosing the Existence of Industrial Barriers to Entry

Abstract

Entry relates with the appearance of a new producer in a market or industrial sector. The role
of entry is critical, because it operates as a balancing force against high levels of industrial
concentration and the abuse of dominant position by firms with large market shares. The ease
of entry is adjusted according to the number and height of barriers to entry. A barrier to entry
can be defined as anything that restricts competition in a sector, when more competition
would be socially beneficial. The current research proposes a practical method for diagnosing
the existence of industrial barriers to entry and for measuring their overall height. The
method is based in the principle that profits attract new entrants in an industry, and sectors in
which there is an increase of incumbent firms’ profitability, without new entry taking place,
are cases of sectors with high barriers to entry. The method is applied in six European
industrial sectors, based on data taken from Eurostat.