Barriers To Entry - Classification and Examples

Classification and Examples

Michael Porter classifies the markets into four general cases:

• High barrier to entry and high exit barrier (for example, telecommunications, energy)
• High barrier to entry and low exit barrier (for example, consulting, education)
• Low barrier to entry and high exit barrier (for example, hotels, ironworks)
• Low barrier to entry and low exit barrier (for example, retail, electronic commerce)

• Markets with high entry barriers have few players and thus high profit margins.
• Markets with low entry barriers have lots of players and thus low profit margins.
• Markets with high exit barriers are unstable and not self-regulated, so the profit margins fluctuate very much over time.
• Markets with a low exit barrier are stable and self-regulated, so the profit margins do not fluctuate much over time.

The higher the barriers to entry and exit, the more prone a market tends to be a natural monopoly. The reverse is also true. The lower the barriers, the more likely the market will become perfect competition.