What Is a Barrier to Entry?

In the Papers and Proceedings of the Forty-eighth Meeting of the American Economic Association, Donald H. Wallace (1936 p. 83) proposed a research program that proved visionary: "The nature and extent of barriers to free entry needs thorough study." Fifteen years later, Joe S. Bain published a book that was the first thorough study of entry barriers.

In this book, Bain (1956) defined an entry barrier as anything that allows incumbents to earn above-normal profits without inducing entry. He believed that economies of scale and capital requirements meet his definition because they seem to be positively correlated with high profits. George J. Stigler (1968) later defined an entry barrier as a cost advantage of incumbents over entrants. With equal access to technology, scale economies are not an entry barrier according to this definition, and neither are capital requirements, unless incumbents never paid them.

With respect to scale economies and capital costs, the definitions of Bain and Stigler are at variance, which has resulted in controversy among economists and antitrust lawyers, both over the definition of an entry barrier, and the question of whether scale economies and capital costs each constitute one. The present article is an attempt to resolve the controversies concerning the concept of barriers to entry. We begin by contrasting the definitions of an entry barrier proposed in the economics literature. We then introduce a classification system to clear up the existing confusion, and we employ it to assess the nature of the barriers posed by scale economies and sunk costs.

I. History of the Concept

In chronological order, the seven principal definitions of an entry barrier proposed in the economics literature are as follows.

Definition 1 (Bain, 1956 p. 3): A barrier to entry is an advantage of established sellers in an industry over potential entrant sellers, which is reflected in the extent to which established sellers can persistently raise their prices above competitive levels without attracting new firms to enter the industry.

Definition 2 (Stigler, 1968 p. 67): A barrier to entry is a cost of producing (at some or every rate of output) that must be borne by firms seeking to enter an industry but is not borne by firms already in the industry.

Definition 3 (James M. Ferguson, 1974...