1.4 Oligopoly in Practice Flashcards
What is collusion?
An agreement among sellers to act jointly in their common interest. Collusion may be overt or covert, explicit or tacit.
What is overt or covert collusion?
Where explicit agreement occurs, economists speak of overt or covert collusion, depending on whether the agreement is open or secret.
What is tacit collusion?
Where no explicit agreement actually occurs, economists speak of tacit collusion. In this case, all firms behave cooperatively without an explicit agreement to do so. They merely understand that it is in their mutual interest to restrict output and to raise prices.
What are three types of competitive behavior?
First, firms with differentiated products may compete by reducing their prices and hoping to attract customers away from their rivals.
Second, firms often actively engage in non-price competition, especially through advertising campaigns and variations in product quality.
Finally, many firms find that they can keep a step ahead of their rivals by developing new products or by making significant improvements to existing ones.
What are some ways that oligopolist compete with each other?
There are strong incentives for oligopolists to compete with each other through pricing, advertising, product quality, and innovation. Consumers usually gain from such competition.
Describe Brand Proliferation as an Entry Barrier
The larger the number of differentiated products that are sold by existing oligopolists, the smaller the market share available to a new firm that is entering with a single new product. Brand proliferation therefore can be an effective entry barrier.
How is Advertising an entry barrier?
A new entrant with small sales but large required advertising costs finds itself at a substantial cost disadvantage relative to its established rivals.
Describe predatory pricing as an entry barrier
A firm will not enter a market if it expects continued losses after entry. An existing firm can create such an expectation by cutting prices below costs whenever entry occurs and keeping them there until the entrant goes bankrupt. The existing firm sacrifices profits while doing this, but it sends a discouraging message to potential future rivals, as well as to present ones.
What is the reputation effect?
Even if this strategy is costly in terms of lost profits in the short run, it may pay for itself in the long run by creating reputation effects that deter the entry of new firms at other times or in other markets that the firm controls.
Is predatory pricing legal in Canada?
Predatory pricing is illegal in Canada, and a number of firms have been convicted of using it as a method of restricting entry.
What kind of industries does Oligopoly typically occur?
Oligopoly is found in many industries and in all advanced economies. It often occurs in industries with significant economies of scale. In such industries, there is simply not enough room for a large number of firms all operating at or near their minimum efficient scales.
Why is Oligopoly an important market structure in modern economies?
Oligopoly is an important market structure in modern economies because there are many industries in which the minimum efficient scale is simply too large to support many competing firms. The challenge to public policy is to keep oligopolists competing, rather than colluding, and using their competitive energies to improve products and to reduce costs, rather than merely to erect entry barriers.
