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.Exit barriers (or barriers to exit) are obstacles that stop or prevent the exit of a firm from a specific market. It is associated with firms that are incurring in some form of losses, but cannot exit the market as a result of exit barriers that would further increase their level of loss. In Michael Porter’s model of competitive analysis, barriers are a fundamental element to gauge the level of competition in a sector, and defines the market structure in that industry. He identified the following exit barriers:
Non-transferable assets: when a firm invests on specialised assets, which cannot be used in other industries, exiting the market implies losing those assets.
Fixed exit costs: such as indemnities paid to employees, cancelation costs in contracts with suppliers, etc.;
Synergies: when producing one good allows for lower costs in the production of other goods, exiting an industry may imply higher costs when producing that good.
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”.
