Question

9. Consider an oligopolistic market for breakfast cereals. If there are four brands currently being sold in this market, how would the entry of two or three more brands of cereal pose an entry barrier in this market? Justify your answer with examples and illustrations. (10 marks) Answer:

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Answer 1

Entry of a new firm in an oligopolistic set up is not easy because of the presence of Entry Barriers. Below are some examples of entry barriers that are present in the market which stops the new firm to enter into the market:

- Large economies of scale and Cost Advantage: Firms operating under oligopoly enjoys economies of scale. With the increase in the level of production, their per-unit cost declines. It has the potential to turn a firm into a natural oligopoly wherein the average cost declines with an increase in output.

- Government Regulation: to enter in a market, new firms have to permits or licenses such as construction permits. Such permits take a huge amount of time making entry difficult.

- Substantial Advertising Investment: A huge amount of investment has to be incurred by the new firm in order to be recognized in the oligopoly market as they face huge competition from existing firms in the market.

- Huge Capital Requirements by the new firms.

Due to the above reasons, it would be difficult for any new firm to enter into the market of breakfast cereals.