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Market Structures: Competition and Monopoly: Question 6

Syllabus 3.7

Multiple choice 1 mark

Brightline Mobile is the only company operating a mobile phone network on the small island nation of Corvale. Building the network of transmission towers and undersea cables needed to carry calls and data across the island cost close to $300 million, an amount that would take a new entrant many years to earn back. No other company has ever attempted to build a rival network on Corvale.

Which of the following best explains why no rival firm has entered the mobile network market in Corvale?

Choose an answer to check it, then compare with the worked solution below.
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Worked solution

Step 1: Identify what the stem actually describes

The stem tells us that building Brightline Mobile’s network of towers and cables cost close to $300 million, and that this is “an amount that would take a new entrant many years to earn back.” This is describing a cost barrier to entry. A specific obstacle that stops a rival firm from setting up in the market, regardless of how much islanders might want a second network.

Step 2: Match this to option B

Option B states that the very high cost of building a competing network discourages new firms from entering. This is exactly what the $300 million figure and the “many years to earn back” phrase are illustrating. A firm considering entry would have to raise this huge sum and wait a long time before it became profitable, which is enough to deter most potential rivals.

Step 3: Rule out the other options

  • Option A (brand loyalty) is not supported by the stem. Nothing is said about how islanders feel about Brightline Mobile compared with an untested rival.
  • Option C (a government price control) is never mentioned; inventing a regulation not stated in the scenario is a common error.
  • Option D (low demand) confuses the cost of supplying a market with how much islanders want the product. The stem never suggests demand for mobile phones is weak, only that entry is expensive.

Final answer

The $300 million cost of building a rival network of towers and cables, which “would take a new entrant many years to earn back,” is a high start-up cost that acts as a barrier to entry, option B.