When Markets Become Too Expensive to Enter
Nearly eight months into writing this series, I have explored how regulation shapes competition, economic incentives, and institutional decision-making, often through the lens of professional sports. This week, I want to return to a more fundamental question that has run through much of that analysis: when does regulation protect a market, and when does it begin protecting the businesses already operating within it?
In 16 of 38 OECD countries, opening a shop that sells clothes can require a specific retail licence. The business is not handling hazardous chemicals, providing medical treatment or operating complex machinery. It is selling clothes. Yet before its owner can begin trading, there may already be regulatory procedures to complete, approvals to obtain and costs to absorb.
That example, highlighted in a 2026 OECD report, illustrates an overlooked feature of economic regulation. Rules designed to establish standards and protect the public can also determine who is able to enter a market in the first place.
For an established business, complying with another requirement may be a relatively minor operating expense. For a prospective competitor, the same requirement can become an obstacle between having a viable idea and being allowed to test it.
The distinction matters because regulation does not affect every business equally.
Large companies generally have access to legal advisers, compliance departments, established administrative systems and sufficient capital to absorb delays. Smaller businesses may face similar formal obligations without comparable resources. A requirement that appears neutral in legislation can therefore have very different economic consequences depending on the size and position of the business subject to it.
This is not necessarily an argument against regulation. Many markets depend on rules that establish trust, protect consumers and prevent harmful conduct. The more interesting issue is whether regulation can unintentionally protect the very businesses it is supposed to regulate.
The Economics of Getting Through the Door
Economists describe the obstacles facing new competitors as barriers to entry. Some arise naturally. Building a semiconductor factory requires enormous investment, while establishing a recognizable consumer brand takes time and money. Other barriers result from legal or institutional requirements, including licences, certifications, permits and mandatory compliance systems.
These requirements can serve legitimate purposes. Financial firms should not be able to handle customers' money without appropriate safeguards. Medical providers need professional standards. Businesses processing sensitive information should face obligations concerning its security.
The difficulty emerges when the cost of meeting a requirement is largely fixed, regardless of the size of the business.
Consider a hypothetical compliance system costing $100,000 annually. For a company generating $100 million in revenue, that represents 0.1% of sales. For a new business generating $1 million, it represents 10%.
Both businesses face the same nominal obligation. Economically, however, they are operating under very different conditions.
The larger company can spread the expense across a substantial customer base. The smaller company must devote a much greater proportion of its resources to satisfying the requirement, potentially leaving less available for hiring, product development or expansion.
This is one reason regulatory complexity can reinforce existing market structures without explicitly favoring established firms.
In its 2025 Economic Outlook, the OECD estimated that regulation-related tasks accounted for approximately $521 billion in US wages in 2024, equivalent to 1.8% of GDP. Its analysis also associated increases in compliance costs with weaker employment growth among young firms.
Those figures do not establish that regulation is economically undesirable. Compliance expenditures can produce substantial benefits, including safer products, better working conditions and more reliable markets. But they demonstrate that the resources required to operate within a regulatory system are economically significant.
And the ability to absorb those costs is unevenly distributed.
When Regulation Becomes a Competitive Advantage
The most counterintuitive implication is that established companies can sometimes benefit from stronger regulation.
A business already operating within a market may have completed the necessary approvals, built compliance infrastructure and developed relationships with regulators. A new competitor must often recreate much of that process before generating revenue.
Additional requirements may increase costs for both organizations, but they can also make entry relatively more difficult for the challenger.
A large company may dislike spending more on compliance while still benefiting from the fact that smaller competitors find those same obligations harder to satisfy. Regulation can therefore reduce profitability in one respect while protecting market position in another.
This effect becomes especially interesting in professional sports, where restricting market entry is often a deliberate part of institutional design.
The NBA, WNBA, NFL and other closed professional leagues do not operate like ordinary markets in which a new competitor can simply establish a business and begin offering the same product. Prospective teams generally need league approval, access to substantial capital and a place within a limited franchise structure.
These restrictions serve important purposes. A league must protect competitive standards, financial stability and the integrity of its schedule. Adding an inadequately financed team could create problems for every other participant.
But restricted entry also creates scarcity.
When the number of available franchises is limited, membership becomes an economically valuable asset. Existing owners benefit from participating in a competition that new investors cannot freely enter, even when there may be substantial demand for additional teams.
The WNBA's expansion illustrates the value of that scarcity. New ownership groups are willing to commit significant capital to join the league, while existing franchises have become increasingly valuable as the commercial market for women's basketball develops.
The comparison is not exact. A sports league must coordinate teams to produce a shared competition, whereas independent retailers do not need one another's permission to operate. Nevertheless, both cases demonstrate how entry rules influence who can participate in a market and who benefits from the restrictions.
The important distinction is between restrictions necessary to protect the market and restrictions that primarily protect the position of those already inside it.
The Competition That Never Arrives
Competition policy often focuses on businesses already operating within a market. Regulators investigate mergers, exclusionary conduct and agreements that may restrict competition.
But market structure is also shaped by businesses that never enter.
A prospective competitor might offer lower prices, a different service model or a technological improvement. If entry costs make that business commercially unviable, consumers lose access to an alternative that never becomes visible.
This makes excessive entry restrictions particularly difficult to evaluate. Their consequences may appear not as an obvious market failure, but as a market that changes less than it otherwise would.
The same principle can apply to professional sports. A city without a franchise may have a substantial potential fan base, suitable facilities and investors willing to support a team. But if league membership is unavailable, that demand cannot necessarily translate into a new participant.
In an open sporting system, competitive success may provide a route into a higher division. In a closed franchise system, sporting merit alone cannot create a place in the league.
Neither model is automatically superior. Closed leagues can offer financial predictability and support long-term investment. Open systems can provide greater mobility but may expose clubs to substantial financial instability.
The economic consequences, however, are different.
A closed league regulates not only how its existing teams compete, but also whether potential competitors are permitted to participate at all.
That is an unusually direct form of market power.
Designing Rules Without Protecting Incumbents
The broader regulatory challenge is determining when entry restrictions are proportionate to the risks they address.
A demanding licensing process for a nuclear facility serves a fundamentally different purpose from an elaborate approval system for an ordinary retail business. Similarly, a professional sports league has legitimate reasons to assess whether a prospective franchise can meet its financial and operational obligations.
But the existence of a legitimate objective does not establish that every restriction used to achieve it is necessary.
In ordinary markets, proportional regulation can help reduce unnecessary barriers. Smaller firms may be permitted to satisfy the same substantive standards through simpler reporting systems or less burdensome administrative procedures.
In sports, the relevant questions are somewhat different. How are expansion decisions made? What criteria determine whether a new team is admitted? Are restrictions primarily protecting competitive quality and league stability, or are they also preserving the scarcity value of existing memberships?
These questions become more consequential as franchise valuations rise.
A league may have good reasons to expand gradually, particularly when talent supply, facilities and broadcasting arrangements need time to develop. But expansion also changes the economic position of existing owners, who may benefit from keeping membership limited.
That creates a potential tension between the collective interests of current participants and the broader development of the market.
It also illustrates why incumbent influence matters in regulatory design.
Established businesses are often better positioned to participate in consultations, understand complex rules and advocate for particular standards. Prospective competitors, especially businesses that do not yet exist, have much less influence.
In professional sports, existing owners frequently participate directly in decisions about admitting new competitors.
That does not make their decisions inherently illegitimate. It does mean that the institutions controlling entry may also have an economic interest in limiting it.
Competition Begins Before the First Sale
The central issue is not whether markets should be regulated more or less. It is whether regulation protects the functioning of a market without unnecessarily protecting the businesses already operating within it.
A rule can improve safety while making entry more difficult. It can protect consumers while reducing the number of organizations competing to serve them. It can impose costs on large firms while strengthening their position relative to smaller challengers.
Professional sports make the underlying tension unusually visible. Leagues restrict entry partly because cooperation between competitors is essential to producing the sporting product. Yet those restrictions also create valuable scarcity and give existing participants considerable influence over who may join them.
The challenge for regulators, whether public authorities or sporting institutions, is to distinguish the protections a market genuinely needs from the restrictions its incumbents would prefer to preserve.
Markets are not competitive merely because the businesses already inside them follow the same rules. Competition also depends on whether new participants have a realistic opportunity to enter, challenge established practices and offer something different.
The most consequential effect of a poorly designed rule may therefore be invisible. It may not be a higher price or an obvious regulatory failure, but a competitor that never arrives.
Regulation can make a market safer while also making it harder to challenge. Protecting a market should not become indistinguishable from protecting the businesses that already control it.
*Photo courtesy of the SFChronicle