Which of the following has the lowest exit/entry barrier?

Question

Which of the following has the lowest exit/entry barrier?

a.
Monopolistic competition
b.
Monopoly
c.
Perfect competition
d.
Oligopoly

Answer 1

Hi James,

 

Here is the answer to your question:

ENTRY

Monopolies have the greatest barriers to entry due to their dominance over the market, their recognition, patents, licenses, etc (example: an area that has only one cable company).

 

Oligopolies have the second highest barrier to entry. They are similar to monopolies, but have a few different companies in play that have similar but not identical products (example: the cola beverage arena is largely dominated by Coke and Pepsi). 

Monopolistic Competition has low barriers to entry and producers offer a wide variety of products that are acceptable to the same consumers in many cases (example: restaurants in Brooklyn!)

Perfect Competition has the LOWEST barriers to entry - people have very little trouble entering the marketplace, but there are many others to compete with (there is no real world example for this, but a stock exchange without the large investment firms would be a good model to think about). 

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EXIT

The rankings are the same. Perfect competition has the LOWEST barriers to exit followed by MC, then oligopoly, then monopoly. Think about it this way: there are 5 restaurants in your town. You, your family and all of your friends are loyal to restaurant #5. Restaurant #5 closes (heartbreaking, I know), and you and your group have to find a new place. This requires restaurants 1-4 to compete for your business. Because there are so few of them, they have to compete fiercely for your business.

If there were 50 restaurants in your town, losing one would mean that the number of customers entering the open market is relatively small in comparison to the number of customers already at these restaurants. Also, if there were 50 restaurants, you would probably have diversified already and tried many places. 

As you move toward perfect competition, your barrier to exit decreases dramatically because the impact on the consumer and the market is weakened. As you move toward a monopoly, your barrier to exit is huge because your departure will change the market and consumer lifestyle dramatically. 

I hope I answered your question well enough! Let me know if I can help any more!

Zack