Summary
In this LP, we learn about how oligopolists can collude in order to maximise their profits, even though this agreement will not likely last. Also, we see what entry and exit barriers are, and how they affect the number of oligopolists in the market. Finally, we also learn about contestable markets, which mean competitive results can also be reached in oligopolistic markets.Entry barriers (or barriers to entry) are obstacles that stop or prevent the entrance of a firm in a specific market. It is associated with the situation in which a firm wants to enter a market due to high profits or increasing demand but cannot do so because of these barriers. In Michael Porter’s model of competitive analysis, barriers are a fundamental element to gauge the level of competition in a sector, and relates to the market structure. Here are some of these entry barriers:
Economies of scale, economies of scope: any of these could be necessary to enter an industry, since fewer costs can mean the possibility to remain in that industry;
Product differentiation: if incumbent firms in the industry have from customers a certain degree of loyalty towards their products, differentiation may be its origin;
Minimum capital requirements: in some industries, high investments may be needed in order to be able to produce;
Complicated change of supplier: if our potential customers find it hard to change suppliers, they might not be willing to change;
Access to distribution channels: of special interest when considering consumer goods, it means that getting the distribution channels to distribute your product may prove hard;
Costa advantages other than economies of scale: such as technology, know-howor simply because of the learning curve;
Government regulation: requirement of permits or licenses such as construction permits or taxi licenses;
Expected reaction from incumbents: if price wars or predatory pricing is expected, this could act as a barrier to entry.
Although barriers may have negative consequences for some firms, for others they will be positive. Where some firms loose other win, it can be regarded as a zero-sum game. For abnormal profits to occur in a market, barriers have to exist. Using Joe Bain’s definition, “barriers give firms the power to maintain in the long-term prices higher than average cost”.
The figure below shows the relation between entry barriers and market structure:
