The Importance of Entry Barriers
Suppose firms in an oligopolistic industry succeed in raising prices above
long-run average costs and thus earn substantial profits. Without
significant entry barriers, new firms will enter the industry and erode the
profits of existing firms, as they do in monopolistic competition. Natural
barriers to entry were discussed in Chapter 10 , the most important
being a large minimum efficient scale. This type of entry barrier is an
important part of the explanation of the persistence of profits in many
oligopolistic industries.
Where such natural entry barriers do not exist, however, oligopolistic
firms can earn profits in the long run only if they can create entry barriers.
To the extent this is done, existing firms can continue to enjoy high
profits without fear that new firms will enter the industry. We now
discuss three important types of firm-created entry barriers.
- Brand Proliferation as an Entry Barrier
By altering the characteristics of a differentiated product, it is possible to
produce a vast array of variations on the general theme of that product,
each with its unique identifying brand. Think, for example, of the many
different brands of soap or shampoo, breakfast cereals or cookies, and
even cars or motorcycles. In these cases, each firm in the industry
produces several brands of the differentiated product.