How does the existence of barriers to entry affect oligopolies?

The existence of barriers to entry significantly affects oligopolies by allowing some competition while restricting extensive entry into the market. Barriers to entry can include factors such as high startup costs, economies of scale, brand loyalty, patent protections, and regulatory requirements. These barriers mean that while potential new competitors may find it difficult to enter the market, existing firms within the oligopoly may still experience some degree of competitive pressure.

For instance, if there are only a few dominant firms in an industry, these firms can still engage in competitive practices, such as price wars or product differentiation, to gain market share against one another. However, because the barriers deter new entrants from easily joining the market, the overall number of competitors remains limited. As a result, the competition is contained, and the market does not exhibit the same level of rivalry as in a more open market structure like perfect competition. This mixture results in a unique competitive environment characterized by both limited competition due to the barriers and the dynamics within the existing firms.