Oligopoly: characteristics and barriers to entry and exit

Characteristics

• A high concentration ratio: a few firms supply most of the market.
• Interdependence: each firm's best decision depends on how its rivals react.
• Barriers to entry and exit.
• Products may be differentiated (cars, smartphones) or close to homogeneous (cement, oil).
• Firms often prefer non-price competition, and there is an incentive to collude.

Barriers to entry and exit

• Economies of scale: incumbents have low average costs; a new small entrant would have higher costs.
• Limit pricing: incumbents set price low enough that a new entrant could not make a profit at its higher costs.
• Patents and other intellectual property: legal protection of inventions.
• Branding and advertising: strong brand loyalty is costly for an entrant to overcome.
• Sunk costs: costs that cannot be recovered on leaving (advertising, specialist equipment with no resale value). High sunk costs make entry risky and are also a barrier to exit.
• Legal barriers: licences, franchises, regulations.

Real example: GB groceries

In the 12 weeks to 10 August 2025, the four largest GB grocers had a combined share of 66.0% (Worldpanel by Numerator data reported by Grocery Gazette). National store networks, buying power and brand loyalty are barriers. Yet the discounters Aldi and Lidl, relatively recent entrants to GB grocery, held 10.8% and 8.3%, which shows barriers can be overcome.

Exam tip

When asked about barriers, apply them to the industry in the source booklet and explain how each one stops entry or protects profit. The January 2021 mark scheme capped essay marks when there was no reference to the industry in the question.

Worked example

Explain how high sunk costs act as a barrier to entry in the airline industry.

1. Entering needs large spending on advertising, staff training and airport slots that cannot be recovered if the firm fails.
2. So a failed entrant loses that money.
3. The risk deters entry, protecting incumbents' supernormal profits.

Answer: Unrecoverable costs raise the risk of entry, so fewer firms enter.

Check yourself

1. Which feature most distinguishes oligopoly from other market structures?
   • Interdependence between firms
   • Identical products
   • No barriers to entry
   • Price-taking behaviour
   Show answer

   Interdependence between firms. Each firm must consider its rivals' reactions.

2. A sunk cost is
   • any fixed cost
   • the cost of raw materials
   • a cost that cannot be recovered if a firm leaves the market
   • a cost that falls as output rises
   Show answer

   a cost that cannot be recovered if a firm leaves the market. For example, advertising spend cannot be resold.

3. Limit pricing means
   • setting price low enough to deter new entrants
   • setting price as high as possible
   • pricing below average variable cost to drive out an existing rival
   • pricing at the government's maximum price
   Show answer

   setting price low enough to deter new entrants. The price is set at a level an entrant with higher costs could not profitably match.

4. How do economies of scale act as a barrier to entry?
   • They raise incumbents' costs
   • They make products identical
   • They guarantee new firms a large market share
   • Incumbents have much lower average costs than a small new entrant
   Show answer

   Incumbents have much lower average costs than a small new entrant. An entrant starting small cannot match incumbents' costs and prices.

5. Which is a legal barrier to entry?
   • Strong brand loyalty
   • A patent on a new drug
   • Economies of scale
   • High advertising spending
   Show answer

   A patent on a new drug. A patent gives the holder the legal right to stop others making the product for a period.

6. Using GB grocery shares for the 12 weeks to 10 August 2025 (Tesco 28.4%, Sainsbury's 15.0%, Asda 11.8%, Aldi 10.8%), find the 4-firm concentration ratio.
   Show answer

   66.0 %. 28.4 + 15.0 + 11.8 + 10.8 = 66.0%.

7. Explain how branding can act as a barrier to entry.
   Show answer

   Strong brand loyalty means consumers keep buying established brands, so a new entrant must spend heavily on advertising, a sunk cost, to win customers, which raises its costs and the risk of entry.. Link brand loyalty to the cost or difficulty for an entrant.

Practise with instant feedback Print this lesson

Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification (XEC11/YEC11), Unit 3 Business behaviour and Appendices 6 and 7
• Grocery Gazette, 19 August 2025: Worldpanel by Numerator (formerly Kantar) GB grocery market shares, 12 weeks to 10 August 2025
• Pearson Edexcel IAL Economics WEC13/01 mark scheme, January 2021

Last updated 8 November 2026. Spotted a mistake? Tell us.