Barriers to entry:

Barriers to entry
Oligopolies and monopolies frequently maintain their position of dominance in a market
might because it is too costly or difficult for potential rivals to enter the market. These
hurdles are called barriers to entry and the incumbent can erect them deliberately, or they
can exploit natural barriers that exist.

Natural entry barriers include:

Economies of large scale production.

If a market has significant economies of scale that have already been exploited by the
incumbents, new entrants are deterred.
Ownership or control of a key scarce resource.

Owning scarce resources that other firms would like to use creates a considerable barrier to
entry, such as an airline controlling access to an airport.
High set-up costs.

High set-up costs deter initial market entry, because they increase break-even output, and
delay the possibility of making profits. Many of these costs are sunk costs, which are costs
that cannot be recovered when a firm leaves a market, and include marketing and
advertising costs and other fixed costs.
High R&D costs

Spending money on Research and Development (R & D) is often a signal to potential

entrants that the firm has large financial reserves. In order to compete, new entrants will
have to match, or exceed, this level of spending in order to compete in the future. This
deters entry, and is widely found in oligopolistic markets such as pharmaceuticals and the
chemical industry.

Artificial barriers include:

Predatory pricing.

Predatory pricing occurs when a firm deliberately tries to push prices low enough to force
rivals out of the market.
Limit pricing.

Limit pricing means the incumbent firm sets a low price, and a high output, so that entrants
cannot make a profit at that price. This is best achieved by selling at a price just below
the average total costs (ATC) of potential entrants. This signals to potential entrants that
profits are impossible to make.
Superior knowledge

An incumbent may, over time, have built up a superior level of knowledge of the market, its
customers, and its production costs. This superior knowledge can deter entrants into the
market.
Predatory acquisition

Predatory acquisition involves taking-over a potential rival by purchasing sufficient shares to

gain a controlling interest, or by a complete buy-out. As with other deliberate barriers,
regulators, like the Competition Commission, may prevent this because it is likely to reduce
competition.
Advertising

Advertising is another sunk cost - the more that is spent by incumbent firms the greater the
deterrent to new entrants.
A strong brand

A strong brand creates loyalty, locks in existing customers, and deters entry.
Loyalty schemes

Schemes such as Tescos Club Card, help oligopolists retain customer loyalty and deter
entrants who need to gain market share.
Exclusive contracts, patents and licences

These make entry difficult as they favour existing firms who have won the contracts or own
the licenses. For example, contracts between suppliers and retailers can exclude other
retailers from entering the market.

Vertical integration

Vertical integration can tie up the supply chain and make life tough for potential entrants,
such as an electronics manufacturer like Sony having its own retail outlets (Sony Centres),
and a brewer like Heineken owning its own chain of UK pubs, which it acquired from the
brewers Scottish and Newcastle in 2008.
Collusive oligopolies
Another key feature of oligopolistic markets is that firms may attempt to collude, rather
than compete. If colluding, participants act like a monopoly and can enjoy the benefits of
higher profits over the long term.

Types of collusion
Overt

Overt collusion occurs when there is no attempt to hide agreements, such as the when firms
form trade associations like the Association of Petrol Retailers.
Covert

Covert collusion occurs when firms try to hide the results of their collusion, usually to avoid
detection by regulators, such as when fixing prices.
Tacit

Tacit collusion arises when firms act together, called acting in concert, but where there is no
formal or even informal agreement. For example, it may be accepted that a particular firm is
the price leader in an industry, and other firms simply follow the lead of this firm. All firms
may understand this, but no agreement or record exists to prove it. If firms do collude, and
their behaviour can be proven to result in reduced competition, they are likely to be subject
to regulation. In many cases, tacit collusion is difficult or impossible to prove, though
regulators are becoming increasingly sophisticated in developing new methods of detection.
Competitive oligopolies
When competing, oligopolists prefer non-price competition in order to avoid price wars. A
price reduction may achieve strategic benefits, such as gaining market share, or deterring
entry, but the danger is that rivals will simply reduce their prices in response.
This leads to little or no gain, but can lead to falling revenues and profits. Hence, a far more
beneficial strategy may be to undertake non-price competition.

UK Competition Policy.
In economic theory, firms may collude or using their monopoly power to get rid of competitors
unfairly in a way that would benefit them; and the government may have to act to stop this. John

Sloman (2008) has highlighted that in the UK, the Office of Fair Trading (OFT) has been
established to ensure that the prohibitions under the 1998 Competition Act and the 2002
Enterprise Act are conducted. The OFT supervises company conduct and for further
investigation, it can refer suspected individual companies to the Competition Commission (CC)
(Sloman 2008: 262). The CC is in charge of determining whether the firms practices such as
supplying more than 25 per cent of the total market, various collusive practices of oligopolies, or
the abuses of a firms monopoly power are detrimental to competition (Sloman 2008: 262). If the
Competition Commission decides that firm is guilty then it would introduce appropriate remedies,
for example, forbidding many firms practices.
If firms abuse their monopoly power by trying to refuse producing products, enforce unfairly
trading conditions or trying to produce less with higher prices; then it would result to market
failure, because there is no fair competition in the market. The consequences in the market
would be high prices products as dominant firms determine the prices and lower quantity of
productions - almost there are only their goods in the market as other competitors are being
eliminated. Thus, the consumers do not have many choices, people with high income or average
income might be still afford the high price goods, however those with low income or
unemployment would find it difficult. The firms did not make maximising efforts to provide goods
and services at lowest prices so there is no efficiency, on the contrary, it is a waste of resources.
If there is competition in the market and it is fair, then there will be opening for all players who
benefit from perfect information on prices and availability of goods and services, and they will do
all their best to compete with each other. Hence, the result will be lower prices and increasing
more innovation with new products variety and quality. Therefore, the need for Competition
Policy and especially in the UK is necessary.
To be able to advocate above conclusion and to understand more deeply how Office of Fair
Trading (OFT) is working, the next part of this section will discuss about a case where the
grocery market has been investigated. The OFT had decided to investigate on four largest
supermarkets (Asda, Tesco, Sainsburys, Morrisons) about their supply of groceries on 2006
(OFT 2006). The OFT suspected that the big supermarkets have colluded with each other, and
made it difficult and costly for other new stores to entry and compete in the market. It also thinks
that the four largest supermarkets buyer power have increased, and pricing conducts (for
instance, the suppliers prices introduce to big supermarkets have increased in the differences
from the wholesalers and buying groups, price flexing) would distort the competition in the
market, and harm the consumers choices in products (Crown copyright 2006). However, that is
only the OFT suspecting and they were still investigating until 30th April 2008 that the
Competition Commission published its final report (Peter Freeman 2009). In 2009, the
government has basically agreed to OFT and their remedies. In summary, an investigation in
such large supermarkets take a lot of time (few years) and it is also take quite a number of time
to obtain the government agreement and impose the remedies to the firms.

Conclusion:
In summary, the oligopoly in the supermarkets has more advantages than the disadvantage for
the consumers in the UK. When the oligopolistic supermarkets offer the lower and rigid price, the
consumers still can enjoy the preeminent quality of service, and according to the kinked demand
curve, the prices of the products will be lower. Nonetheless, the four main supermarkets collude

immorally sometimes in order to get the maximum profits and have non-competition to make
processes. If the oligopolistic supermarkets want to be beneficial to the consumers, they are
necessary to have at least three oligopolies, which have different market share, and the most
significant way is not to be collusion.

REFERENCES:
1. Economics Online
2. Anderton, A. (2008) Economics (5th Edition). Harlow: Pearson Education
2. Warren (2009) AllExperts http://en.allexperts.com/q/Economics-2301/2009/10/oligopoly.htm
3. Pearson (2010) Kinked Demand
4. Game Theory: Supermarkets During The Festive Season, November 2013, by Phil Hensman
5. Supermarkets kill free markets as well as our communities by Peter Wilby, 3 May 2011,

The Guardian.