Dynamic Analysis of Barriers to Entry as a Task for an Intelligent Tool

By Mach, Maria A. | Issues in Informing Science & Information Technology, Annual 2004 | Go to article overview

Dynamic Analysis of Barriers to Entry as a Task for an Intelligent Tool


Mach, Maria A., Issues in Informing Science & Information Technology


Introduction

Many factors that should be taken into account while discussing enterprise strategy exist in the economic environment of an enterprise. In one of the best known models of this environment, by M. E. Porter (1999), the environment consists of five forces: barriers to entry to a market space, the lobby of buyers, the lobby of suppliers, substitutes, and fight between market rivals. It is a very simplified model, nevertheless it shows that barriers to entry constitute one of the main factors that are to be analysed while formulating enterprise strategy, all the more Porter is not the only author stressing the importance of this factor. It is also important that barriers to entry--as other elements of economic environment--change dynamically, so it becomes necessary to take into consideration their temporal aspect.

The main goal of the paper is to formulate the problem of dynamical analysis of barriers to entry and to analyse it as a task for an intelligent tool, that is, the tool that aids inference.

The rest of the paper is organised as follows. Section 2 contains definitions from the literature of barriers to entry. It also contains a short explanation of types of barriers to entry as well as their role in enterprise strategy. Section 3 is devoted to the problem of dynamic analysis of barriers to entry. In the next section we define the tasks that should be performed by an intelligent tool that is to help decision makers in the dynamic analysis of barriers to entry. We also include in that section a short survey on some of the solutions that can be found in the literature, and analyse them in the context of the problem defined. In section 5 we present an initial sketch of a tool that would help the decision makers to perform a dynamic analysis of barriers to entry. Finally section 6 is devoted to conclusions and future research directions.

Definition and Types of Barriers to Entry: The Role of Barriers in Enterprise Strategy

Many definitions of barriers to entry can be found in the literature. The simplest and the most intuitive of them is the one saying, that a barrier to entry means everything that makes entry to a branch or market space difficult for economic entities ("Barriers to Entry", 1994).

Next, Stigler, Baumol, and Willig define a barrier to entry as an expense that has to be borne by an enterprise to enter the market space, but that does not have to be borne by economic entities already operating on the market ("Barriers to Entry", 1994). Their definition is similar to the one of Gilbert, who defines a barrier to entry as "a rent that is derived from incumbency" (Gilbert, 1989). Finally, there is a definition used by Bain, who--in his classic book Barriers to new competition: their character and consequences in manufacturing industries defines a barrier to entry as a level, to which incumbents can elevate their prices above the minimal average cost, without encouraging new enterprises to enter the market (Bain, 1993).

The fact that there are so many definitions of barriers to entry can be seen in a way as derived from the fact there are so many different kinds of barriers. A diversity of classifications concerning barriers to entry is found in the literature. We will quote here the classification proposed by economists from British Office of Fair Trading ("Barriers to Entry", 1994).

In their study devoted to barriers to entry ("Barriers to Entry", 1994), the economists from British Office of Fair Trading, taking into account the type of cost that has to be borne by an enterprise wishing to enter the market, distinguished the following types of barriers:

a) absolute cost advantage that an incumbent possesses over a potential entrant. One can talk about such barrier if future (potential) costs per unit of production of a potential entrant are generally higher than those of the incumbents. The main sources of this barrier are patents, resources control, monopolisation of specific knowledge (so-called know how);

b) strategic advantage--here we can distinguish the following groups of barriers:

* sunk costs and economies of scale--the necessity to bear the costs of the entry, that would not be paid off in case of failure; the necessity of entering on the big scale if the venture is to bring profits;

* product differentiation and advertising. …

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