9781118041581

entry predisposes a perfectly competitive market to zero economic profits in

the long run. Conversely, significant barriers to entry (as listed and described

in Chapter 8) are a precondition for monopoly. Ease of entry is also crucial for

analyzing oligopoly. Boeing and Airbus compete vigorously to sell new aircraft,

but barriers to entry due to economies of scale protect them from new com-

petitors. By contrast, numerous new discount airlines in the United States and

Europe have dramatically changed the competitive landscape in the air travel

market. Similarly, a small independent studio (putting together a good script,

directing talent, and up-and-coming actors) can produce a well-reviewed and

profitable hit movie despite the formidable clout of the major studios.

The impacts of substitutes and complements directly affect industry

demand, profitability, and competitive strategy. In a host of industries, this

impact is ongoing, even relentless. For instance, trucking and railways are sub-

stitutes, competing modes of transport in the long-haul market. Soft-drink con-

sumption suffers at the hands of bottled water, sports drinks, and new-age

beverages. In other cases, the emerging threat of new substitutes is crucial.

Cable companies have long challenged network television (with satellite TV a

third option) and now vigorously compete for local telephone customers. Since

the millennium, online commerce has steadily increased its sales, often at the

expense of “brick-and-mortar” stores. The fast growth of hybrid automobiles

poses a long-term threat to traditional gasoline-powered vehicles.

More recently, new attention and analysis has been paid to the industry

impact of complementarygoods and activities. Computer hardware and soft-

ware are crucial complements. Steady growth in one market requires (and is

fueled by) steady growth in the other. Although Barnes & Noble superstores

compete with online seller Amazon, its sales are enhanced by its own online

arm, barnesandnoble.com. Coined by Adam Brandenberger and Barry

Nalebuff, the term coopetitiondenotes cooperative behavior among industry

“competitors.” Thus, firms in the same industry often work together to set

352 Chapter 9 Oligopoly

FIGURE 9.1

The Five-Forces

Framework

Supplier

Power

Buyer

Power

Internal

Rivalry

Substitutes

and Complements

Entry

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