Assumption 2 there are significant barriers to entry

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Unformatted text preview: imes the presence of large economies of scale provides a major barrier to entry even if the existing firms do not actively engage in entry preventing behaviour. C C LRAC (with advertising) LRAC df X Car Manufacturing LRAC X Toothpaste Manufacturing df Large Economies of Scale It takes a large market share (df) to attain an output level at which costs per unit are low enough to compete with existing firms. (Large Scale Barriers to Entry). Small Economies of Scale Technology is so simple by comparison that most reductions in costs per unit can be realized with a small market share. (Weak Scale Barriers to Entry). Obviously, it takes relatively little investment and knowledge to enter the toothpaste industry than it does to enter the auto industry. For this reason, existing firms in such industries often protect themselves against entry by artificially raising costs. Heavy advertising, for example, effectively raises the LRAC curve. Another way to discourage entry is for the existing firm to create many different brands of toothpaste that cater to different tastes of consumers, hence making it difficult for new entrants to get into niche markets without considerable expense. These (and other) techniques are referred to as created barriers to entry and they are most often used in markets that are not naturally protected by the existence of large economies of scale. ASSUMPTION #3: Firms in oligopolistic markets are aware of their own interdependence with competing firms and act accordingly. 282 Oligopolistic firms often confront large competitors that are not tightly controlled by the discipline of competitive forces and whose actions can significantly affect prices and market shares. For this reason, they must be constantly on guard against their competitors' hostile actions and must weigh the potential costs and benefits of their own market strategies in terms of their competitors' responses. One of the most crucial decisions facing oligopolistic firms is whether to act on their own or to collu...
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This note was uploaded on 05/25/2010 for the course ECON 301 taught by Professor Sning during the Spring '10 term at University of Warsaw.

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