With greater control over prices, it can be expected that oligopolistic industries will generally enjoy higher rates of profit than competitive industries. In competitive industries, above-average rates of profit usually attract new producers into the industry, causing output (supply) to rise and prices and profits to fall. This does not happen so readily in oligopolistic industries for several reasons, known as “barriers to entry” to an industry.
A major barrier to entry into many oligopolistic industries, such as steel mills and automobile manufacturing, is the vast amount of capital required to start business on a large enough scale to be efficient and competitive. A related problem for newcomers concerns securing a sufficient volume of sales to support an efficient level of production. One problem facing newcomers in this area is the tremendous volume and cost of advertising required to compete on the terms used by the industry leaders. Some oligopolists spend from 15 c to 40 c of every sales dollar on advertising – something a struggling newcomer could scarcely afford. Another problem that a newcomer would face would be consumer acceptance – regardless of how good the products of the existing producers are (or aren’t), the consumer has become familiar with them over the year, and the familiarity is strongly reinforced by the heavy advertising that oligopolists usually do. It is quite difficult for a newcomer to break down these attitudes. Another problem that prevents newcomers from imitating and established producer’s product is the patent, which is a legal device that has been used to great advantage by the drug companies.
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