11. oligopoly Flashcards
what are the assumptions of an oligopoly
a few large firms
high concentration ratio between the top 3-5 firms in the market
high barriers to entry and exit
abnormal profit earned in the short and long run
sell differentiated products (use branding and brand loyalty)
what is a firms concentration ratio
their market share (the % of sales in the industry)
what happens to prices in oligopolys
they are relatively stable due to the threat of price wars - where all businesses lose out
what is collusion and when can this happen
occurs when two or more firms work together to set prices or output levels to maximise joint profits
can only happen in an oligopoly
results in monopoly prices, the market operates as if there is only one firm
collusion is illegal, as t takes advantage of customers, forcing them to pay higher prices
what can you use to demonstrate oligopolys interdependent behaviour
game theory and NASH equilibrium
reasons why oligopolys should not compete on price
it is likelty to provoke a price war, rival large firms start undercutting each others prices, so no firm gains more customers. customers then gain from lower prices while firms do not gain from increased demand
what is price leadership
when one dominant firm (biggest firm) in the market sets the price and other large firms follow and uses the same price (because of fear of causing price wars with dominant firm
what non-price factors can oligopolies compete with
dranding
advertising
choice of locations
product differentiation & more innovations
customer service
sales promotions
facilities
how does game theory show why oligopoly firms prices usually remain stable
firms know that there pricing decision will affect how much revenue they will recieve, and firms often dont trust eachother, so they will both choose the Nash equilibrium
this is the choice where firms will only gain a better result if the other firm decides to change their decision
what does an oligopolies diagram look like and why
KINKED DEMAND (AR) CURVE
the price elasticity of demand may depend on the likely reaction of rivals to changes in one firms price and output
a. rivals are assumed not to follow a price increase of one firm - so the acting firm will lose market share - therefore demand is elastic
b. rivals are assumed to match a price fall by one firm showing price leadership, in order to avoid a loss of market share - causing demand to be more inelastic
(first half more elastic, second half more inelastic, MR curve is broken)
are oligopolies allocatively efficient
neither in long or short run, as they are able to charge higher prices than P=MC
are oligopolies productively efficient
neither in long or short run, as oligopolies seek profit maximisation, they do not produce the greater output to chieve productive efficiency (AR=MC)
are oligopolies statically efficient
no as they are not allocatively or productively efficient
are oligopolies dynamically efficient
yes as they make abnormal profit in the short and long run
are oligopolies x efficient
yes due to a lack of competitive pressure, but they do have big rivals so this may make firms act x efficient to ensure they can compete with one another
why do oligopolies make countries less internationally competitive
because of a lack of competition (x efficiency) - meaning prices are high - so there will cheaper imports and less exports
AD will shift left causing unemployent and falling GDP
