Oligopoly and barriers to entry or exit
| English | 中文 | Pinyin |
|---|---|---|
| oligopoly/ˌɒlɪˈɡɒpəli/ | 寡头垄断 | guǎ tóu lǒng duàn |
| barrier to entry/ˈbærɪə tʊ ˈentri/ | 进入壁垒 | jìn rù bì lěi |
| patent/ˈpeɪtənt/ | 专利 | zhuān lì |
| sunk cost/sʌŋk kɒst/ | 沉没成本 | chén mò chéng běn |
A decision you can investigate
- A supplier watches two major rivals before changing its price. An entrant can buy equipment but may lose its launch advertising if it leaves.
- Few firms and difficult entry are separate pieces of evidence.
Build the explanation
- Oligopoly 寡头垄断 is a market dominated by a few significant firms whose decisions are interdependent: each expects rivals to respond to price, output or product changes. Products may be homogeneous or differentiated. Firms need not have equal shares or agree with each other. A barrier to entry 进入壁垒 makes market entry harder or less viable. Entry barriers can sustain positions; exit costs affect whether entry is attractive.
- Scale economies can make small-scale entry costly. Limit pricing may make entry appear unprofitable. Patents restrict use of protected methods/products for their applicable scope; branding can create loyalty and switching difficulties. Sunk expenditure cannot be recovered on exit; legal licensing or other rules can constrain entry. These six sources can combine, but a large initial investment is not automatically sunk if assets have a resale use.
Work through the evidence
- A fictional entrant pays equipment100 and launch advertising40. It can resell equipment for80 but cannot recover advertising. If it exits immediately with other effects excluded, irrecoverable cost=(100−80)+40=60; total initial outlay140 is not all sunk.
- Separately, an entrant’s attainable average cost at its likely scale is14. An incumbent price12 would not cover that cost if the entrant sells the same product at the same price. This can deter entry in the stated case, but lower cost, a differentiated product, expected future prices or a larger scale can change it.
- A high minimum efficient scale relative to market demand may leave room for only a few low-cost firms; the ratio alone does not prove any agreement.
What is the stated irrecoverable cost?
Equipment loss20 plus advertising40 equals60.
Test the limits
- A barrier can protect returns on innovation or meet safety goals while also limiting rivalry. Evaluate the policy purpose and scope rather than treating every restriction as waste. Branding may reflect reliable quality or costly persuasion. Scale economies can lower unit costs and also make entry harder.
- Entry and exit barriers differ: an unavoidable exit loss affects expected entry risk, while a licence limits permission to start. Resale value is uncertain, not guaranteed80 in real markets. Oligopoly does not imply monopoly, identical prices or collusion; check rival responses, alternatives and entry conditions. These cases are original teaching examples, not descriptions of actual firms or legal advice.
Which is the central oligopoly feature here?
Interdependence does not require collusion.
Every large start-up expenditure is entirely sunk.
Recoverable assets and resale value must be distinguished from irrecoverable spending.
Apply and explain your answer
- Why is sunk cost60 rather than initial outlay140 in the entrant case?
- The firm recovers80 from equipment resale. Only the equipment loss20 and unrecoverable advertising40 are lost on exit.
Why can price12 deter the stated entrant?
The comparison concerns the stated entrant and assumptions, not incumbent cost or every future entrant.
Use the terms precisely
- oligopoly: A market dominated by a few significant firms with interdependent decisions.
- sunk cost 沉没成本: Expenditure that cannot be recovered when an activity is abandoned.
- barrier to entry: An obstacle making entry into a market harder or less viable.
- patent 专利: Protection restricting use of a specified invention under the applicable rules and scope.
Match the terms to their meanings.
Use each term for its stated economic relationship.
A fictional entrant pays equipment100 and launch advertising40. It can resell equipment for80 but cannot recover advertising. If it exits immediately with other effects excluded, irrecoverable cost=(100−80)+40=60; total initial outlay140 is not all sunk. Separately, an entrant’s attainable average cost at its likely scale is14. An incumbent price12 would not cover that cost if the entrant sells the same product at the same price. This can deter entry in the stated case, but lower cost, a differentiated product, expected future prices or a larger scale can change it. A high minimum efficient scale relative to market demand may leave room for only a few low-cost firms; the ratio alone does not prove any agreement.
A barrier can protect returns on innovation or meet safety goals while also limiting rivalry. Evaluate the policy purpose and scope rather than treating every restriction as waste. Branding may reflect reliable quality or costly persuasion. Scale economies can lower unit costs and also make entry harder. Entry and exit barriers differ: an unavoidable exit loss affects expected entry risk, while a licence limits permission to start. Resale value is uncertain, not guaranteed80 in real markets. Oligopoly does not imply monopoly, identical prices or collusion; check rival responses, alternatives and entry conditions. These cases are original teaching examples, not descriptions of actual firms or legal advice.
Oligopoly is a market dominated by a few significant firms whose decisions are interdependent: each expects rivals to respond to price, output or product changes. Products may be homogeneous or differentiated. Firms need not have equal shares or agree with each other. A barrier to entry makes market entry harder or less viable. Entry barriers can sustain positions; exit costs affect whether entry is attractive.