Question

Why is the number of firms small in an oligopoly market? Explain.

Answer 1

There are only a few but large and dominating firms in an oligopoly market. The reasons for few firms are explained in the following points.

1. Restricted Entry- There exists a cut-throat competition among the firms in an oligopoly market. Consequently, it becomes very difficult for any new firm to enter into the market.

2. High Entry Cost- In addition, as the existing firms are the only giants in the market, so it narrows the scope for a new entrant to enter the industry due to high initial costs associated with the entry.

3. High Selling Costs- An oligopolistic firm needs to incur heavy selling costs such as, advertisement expenditures to convince and attract the consumers to buy its products. This is due to existence of high degree of competition in the oligopoly market. These high selling costs are very difficult to be incurred by a new firm; consequently, new firms avoid entering in an oligopoly market.