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.

Answer 1

Meaning of oligopoly:

A market in which there are only few sellers with large number of buyers are available is called an oligopoly market.

For example the four brands currently being sold in this market be Kellogg's, General mills, Quaker oats and Nestle.

The entry of new brands pose an entry barrier in this market because of the following

• Entering into a market requires huge amounts of capital and for the new brands to enter into the market doesn't have sufficient capital as large firms already are well established and have large capital for the requirements thereby posing an entry barrier.
• The existing brands have large number of buyers in the market and the value of their product is higher. So it is difficult for the new brand to attract customers even though their product price is lower than the existing brands.
• A well established firm have control over raw materials which creates strong entry barrier to new firms.
• Cost incurring for research and development is very huge and for the new entry to enter the market must also have resources to pace with the existing brands.
• A strong brand always creates loyalty in customers and to retain customer loyalty , the existing brands creates more offers to the customers which the new brand cannot.
• The cost of advertising is huge and the buyers will be willing to buy the existing brands because of trust issues and other risk factors.
• The value of products of existing brands is large and it is obviously an entry barrier for the new brand to create such value in the buyers.