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Economics- Theme 3 > 10- Oligopoly > Flashcards

10- Oligopoly Flashcards

1
Q

Oligopoly

A

Few firms dominating the market.

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2
Q

Number of buyers and sellers?

A

Few firms dominating the market (high concentration ratios)

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3
Q

Barriers to entry?

A

High barriers to entry

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4
Q

Price setting power

A

Price takers- downward sloping demand curve

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5
Q

How to measure market concentration?

A

Concentration ratio

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6
Q

Concentration ratio

A

Measures the proportion of the market dominated by the largest firms.

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7
Q

Interdependence

A
  • Firms in an oligopoly must be interdependent.

- Actions of one firms will affect another.

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8
Q

Production homogenity?

A

Products are differentiated

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9
Q

Game theory definition

A

The study of strategies used to make decision e.g. on prices, level of advertising, etc.
Used to analyse and evaluate actions of firms in an oligopoly.

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10
Q

A pay-off matrix?

A

A simple two firm, two-outcome model.

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11
Q

Prisoner’s dillema?

A

A model used in game theory to question whether firms might not collude- even if it appears in their best interest and vice versa.

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12
Q

Price strategies used in an oligopoly?

A
  • Price wars
  • Predatory pricing
  • Limit pricing
  • Price leadership
  • Non price competition
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13
Q

Price wars?

A

When price cutting leads to retaliation and other firms cut prices, meaning the original firms wants to cut prices cutting their sales.

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14
Q

Predatory pricing?

A

Involves cutting prices below average cost of production (price below AVC).
Only a short term measure, and once firm is forced out of the market, the firm raises its prices again- almost always illegal.
Almost always illegal

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15
Q

Limit pricing?

A

Cutting prices to the point where new possible entrants or newly entered higher cost firms cannot compete.
The incumbent firm can sustain this position in the long run because it has lower costs.
May or may not be illegal depending on specific cases

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16
Q

Price leadership?

A

In some markets, the dominant firm acts to change prices and others will follow- because if others change there could be a price war- so large firm is leader.

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17
Q

Non-price competition?

A

When firm take action to compete without changing the price of their products- through advertising, loyalty cards, free gifts or similar strategies.

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18
Q

Pure oligopoly?

A

Small number of large firms control the entire market.

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19
Q

Real life oligopoly?

A

Several large firms dominating a market.

20
Q

Duopoly?

A

Two firms that dominate and control a market.

21
Q

Examples of high barriers to entry in an oligopoly?

A
  • Artificial (created by firms)- prices strategies by collusive agreement to shut out other firms.
  • Natural (e.g. loyalty, reputation)
    All allows firms to continue to earn supernormal profits.
22
Q

Collusion definition?

A

When rival firms agree to work together e.g. setting prices to make greater profits.
At the expense of consumers and market’s competitiveness.
E.g. OPEC

23
Q

Cartel definition

A

Involve firms acting as one through an agreement.

24
Q

Why firms collude?

A
  • Enables firms to earn supernormal profits

- A price war suits suit nobody as it is a race to the bottom so collusion can maximise industry profits.

25
Q

How firms collude to drive out new entrants to the market?

A

1) Oligopoly firms earn supernormal profit.
2) Encourages more firms into the market.
3) Supernormal profits shared across more firms (less for existing firms)
4) Existing firms collude
5) All agree to lower prices (predatory pricing)- lower short run profits
6) Existing firms can absorb this and go back to supernormal profits when new firms is driven out of market.

26
Q

Factors to increase chances of cartel success?

A
  • Perfect information (production seen by others, cheating detected)
  • Barriers to entry (stabilised production quota- less disruption)
  • Low demand changes (restrictions in demand may result in firms leaving and disruption could cause cheating.
27
Q

Result of anti-competitive measures of whole market?

A
  • Higher prices
  • Reduces competition
  • Restricts innovation
  • Damages efficiency
  • Harms consumers
28
Q

How can cartels be stopped?

A
  • Regulation- e.g. Competition and Market Authority (CMA)- UK body responsible for strengthening competition and reducing anti-competitive measures
    They can impose fines up to 10% of a company’s global turnover.
29
Q

Overt collusion?

A

Formal and explicit cooperation between rival firms

Cartels help form price fixing agreements where individual firms must abide by production quotas.

30
Q

What happens if production exceeds quota?

A

Market price down-

good for consumers, bad for firms

31
Q

Advantages with overt collusion?

A
  • Higher health and safety standards could be product of overt collusion
  • Improves public welfare
32
Q

Problem with overt collusion?

A

Leaves a paper trail for regulators.

33
Q

Tacit collusion

A

Firms follow a mutually beneficial, cooperative strategy without
explicitly agreeing to do so.

One firms takes on the role as price leader and others follow with the leader setting an artificially high price- profits for all
Often illegal

34
Q

Advantage with tacit collusion

A

Firms go under the radar to avoid detection from regulators (no paper trail).

35
Q

Aim of cartel?

A

To maximise industry profits.

36
Q

Problem with cartel?

A

Firms may go under the radar and produce more than quota and closer to MC=MR and break collusion

37
Q

Aim for firms in an oligopoly?

A

Unclear-

could be sales of profit maximisation.

38
Q

Examples of oligopolies?

A
  • Supermarkets
  • Coffee shops
  • Mobile phone market
  • Broadband
  • Music streaming platforms
39
Q

Productive efficiency?

A

No- oligopolists operate above lowest point on AC curve

40
Q

Allocative efficiency?

A

No- as they set prices above MC so it does not meet society’s needs.

41
Q

Dynamic efficiency?

A

May occur as non-price factors and competition leads to innovation and improvements in technology and production processes.

42
Q

Economies of scale?

A

Scope for economies of scale.

43
Q

Kinked demand curve

A

Assumes that a business faces a dual demand for its products based on the likely reactions of other firms.

44
Q

Elasticity of top part of kinked demand curve?

A

Elastic- because other firms will react and undercut a price rise- loss of market share

45
Q

Elasticity of bottom part of kinked demand curve?

A

Inelastic- other firms will and cut prices, getting into a price war, cutting revenue and market share.

46
Q

Assumptions of game theory?

A
  • Rationality

- Common knowledge

Economics- Theme 3 (19 decks)

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