Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Which statement is true regarding barriers to entry in an oligopoly?

1. Barriers are usually low

2. Barriers are significant

3. No barriers exist

4. Barriers fluctuate frequently

The correct answer is: Barriers are significant

In an oligopoly, significant barriers to entry are a defining characteristic. This means that new firms face considerable obstacles when attempting to enter a market dominated by a few large companies. These barriers can take several forms, including high capital requirements, strong brand loyalty among existing firms, control over essential resources, economies of scale, and government regulations. As a result, potential competitors may be discouraged from entering the market, allowing the established firms to maintain their market power and influence. The presence of significant barriers to entry also means that the existing firms can engage in strategic behaviors, such as price setting and output decisions, without immediate threat from new entrants. This contributes to the stability of the industry structure and allows existing companies to enjoy higher profit margins over time compared to markets with low or no barriers, where competition can be more intense and profits can be driven down. Understanding this characteristic of oligopolistic markets is fundamental for assessing competitive dynamics and developing business strategies within such environments.