Barriers to Entry
Economic, regulatory, or structural obstacles that make it difficult or costly for new competitors to enter an established market.
What is Barriers to Entry?
Barriers to entry are factors that prevent or hinder new competitors from entering a market and competing with established players. High barriers to entry allow incumbent firms to maintain pricing power, earn above-normal profits, and sustain competitive advantages for extended periods. Common barriers include: economies of scale (incumbents produce at lower cost per unit than new entrants); capital requirements (large upfront investment deters entry); network effects (value increases with number of users, as in social media); switching costs (customers face costs to change providers); access to distribution channels; proprietary technology or patents; government regulation and licensing; and brand loyalty. Warren Buffett's concept of an 'economic moat' is essentially a measure of a company's barriers to entry. Industries with high barriers include aerospace, pharmaceuticals, utilities, and semiconductors. Low-barrier industries — like restaurants or freelance services — typically have thin margins due to constant competitive pressure.
Example
The commercial jet aircraft market is dominated by Boeing and Airbus for several reasons: development costs exceed $15 billion per new aircraft model; certification by the FAA and EASA takes years; customers must be trained for each aircraft type (switching cost); airlines prefer large backlogs for delivery certainty; and manufacturer reputations for safety built over decades are irreplaceable. These stacked barriers make new entrants like China's COMAC face decades-long adoption challenges.
Source: Investopedia — Barriers to Entry