Barriers to entry
Anything that stops new firms entering a profitable market, such as scale, patents, licences or control of distribution. They decide how much pricing power incumbents keep, more than concentration does.
Where you will meet it
Barriers to entry appears in 5 learning outcomes on the CFA syllabus. A few of them:
- Analyse the outside forces acting on an industry with the PESTLE framework
“The more these forces are held in check, by barriers to entry, differentiated products or fragmented customers, the higher the returns an industry can sustain.”
- Set out how the concentration of an industry can be measured
“Neither accounts for barriers to entry, which do much to determine pricing power: a concentrated industry that anyone can enter tends to behave more competitively than its share figures suggest.”
- Explain continuing residual income and defend an estimate of it at the forecast horizon in light of the firm's and industry's outlook
“The trap is assuming excess returns persist indefinitely for a company in a competitive industry with low barriers to entry.”
- Explain how the nature of the markets a company sells into bears on its creditworthiness
“Stable, predictable demand, pricing power, high barriers to entry, differentiated products and low sensitivity to the business cycle all support steady cash flow and so lower default risk.”
See also
Practise it
Practise barriers to entry until it is automatic: questions that explain every wrong option.
Take the free diagnostic →