Threat of New Entrants
A firm’s profitability tends to be higher when other firms are blocked from entering the industry. New entrants can reduce industry profitability because they add new production capacity leading to increase supply of the product even at a lower price and can substantially erode existing firm’s market share position. To discourage new entrants, existing firms can try to raise barriers to entry. Barriers to entry represent economic forces (or ‘hurdles’) that slow down or impede entry by other firms. Common barriers to entry include:
(i) Capital requirements
(ii) Economies of scale
(iii) Product differentiation
(iv) Switching costs
(v) Brand identity
(vi) Access to distribution channels
(vii) Possibility of aggressive retaliation by existing players
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