I thought Oligopoly had high barriers to entry/exit. Can someone explain this answer: If an oligopoly is characterized by fierce competition, in long-run equilibrium the firms in the market will earn: A) substantial economic losses. B) substantial economic profits. C) zero economic profits. D) above the firm’s weighted average cost of capital. The correct answer was C) zero economic profits. Free entry and exit implies zero profits in the long run.
It may have high barriers to entry, but if fierce competition exists, this will force more firms to join the industry and lower the profits. It will act almost like monopolistic competition. The barriers to entry are high but not 100%.
I would say more to do with the existing fierce competition. Imagine a case with two firms, fiercely competing for market share, who want to drive volume of sales. If each of them undercuts the other a little they can capture the whole market, and they thus choose the lowest price at which they are not driven out of business. This is by definition zero economic profit. I’m surprised by the answer given - because if barriers to entry are sufficiently high (high initial investment) and payoff low and in the far future, then oligopolies can sustain positive economic profit. So C but for different reasons.
I guess I was thinking of the airlines/auto companies with high barrier to entry, signalling amongst competitors. In the airlines where there was fierce competition they had massive losses. Maybe in the long run the losses can not be sustained and they would have to go out of business so I can see why zero economic profit for the reasons HJAA mentions. Thanks for the insights.
From what I understand, isn’t every single type of the 4 markets characterized by zero economic profits in the long run? (perfect competition has zero in LR and SR)
the show NY Wrote: ------------------------------------------------------- > From what I understand, isn’t every single type of > the 4 markets characterized by zero economic > profits in the long run? (perfect competition has > zero in LR and SR do you believe that monopoly firm will make zero economic profit in the long run? edit: i think given significant barriers to entry, they will continue making economic profit… but i’m just guessing. i didn’t properly read the econ volume
zero economic profit is the result of nash equilibrium when everyone cheats.
Monopoly’s earn an economic profit in the short and the long run (unless gov’t steps in and imposes restriction like average costing in which case they’ll earn zero economic profit in the LR) Oligopoly’s earn economic profit in the SR and LR unless there’s things like gov’t intervention or ‘fierce competition’. The main thing they worry about is co-operation and collusion as well as pricing strategies that are model in: The kink demand curve, and the dominant firm oligpoly Monopolistic competition can earn an economic profit in the SR but not the LR. Things to worry about here are mark-up and excess capacity - know how advertising costs effect demand and price. Perfect competition doesn’t earn an economic profit in the SR or LR. Expanding/Contracting plant size is their worry about the LR as well as technology. Established firms have no edge over new firms. Must produce at their ATC curve in the long run and should be on the LRAC - which is producing a given output at the least possible cost.
tryhard Wrote: ------------------------------------------------------- > zero economic profit is the result of nash > equilibrium when everyone cheats. That’s what I was thinking. If you look at the prisoner’s dilemma scenario, if Prisoner A confesses, his ass is clear. But if he doesn’t confess, he’ll be sent to the slammer if Prisoner B confesses. Same goes for Prisoner B, so both parties have an incentive to confess, and in an economic sense economic profits will be driven down to 0.