3.4.4

Question 1

Characteristics of an oligopoly

Answer 1

• high barriers to entry and exit (less competitive)
• high concentration ratio
• interdependence of firms
• product differentiation

Question 2

What is ‘the concentration ratio of a market’?

Answer 2

The combined market share of the top few firms in a market
The higher the concentration ratio, the less competitive the market , since fewer firms are supplying the bulk of the market

Question 3

Collusive behaviour

Answer 3

Occurs if firms agree to work together on something

Question 4

What does collusion lead to

Answer 4

Collusion leads to a lower consumer surplus, higher prices and greater profits for the firms colluding
Firms in an oligopoly have a strong incentive to collude

Question 5

Non-collusive behaviour

Answer 5

Occurs when the firms are competing
Establishes a competitive oligopoly
More likely to occur when there are several firms

Question 6

Overt collusion

Answer 6

A formal agreement made between firms
Works best when there are only a few dominant firms

Question 7

Costs of collusion

Answer 7

• there is a loss of consumer welfare, since prices are raised and output is reduced
• the absence of competition means efficiency falls, this increases the average costs of production
• reinforces the monopoly power of existing firms and makes it hard for new firms to enter
• a lower quantity supplied leads to a loss of allocative efficiency

Question 8

Benefits of collusion

Answer 8

-industry standards could improve. This is especially true in the pharmaceutical industry and for car safety technology
- excess profits could be used for investment, which might improve efficiency in the long run
- it saves on duplicate research and development
- by increasing their size, firms can exploit economies of scale, which will lead to lower prices

Question 9

Cartel

Answer 9

A cartel is a group of 2 or more firms which have agreed to control prices, limit output, or prevent the entrance of new firms into the market

Question 10

What do cartels lead to

Answer 10

Cartels lead to higher prices for consumers and restricted outputs

Question 11

When does price leadership occur

Answer 11

Price leadership occurs when one firm changes their prices and other firms follow
This firm is usually the dominant in the market

Question 12

Game theory

Answer 12

Related to the concept of interdependence between firms in an oligopoly
It is used to predict the outcome of a decision made by one firm, when it has incomplete information about the other firm

Question 13

Prisoners dilemma

Answer 13

Game theory can be explained by the prisoners dilemma.
Model based around 2 prisoners, who have the choice to either confess or deny a crime
The consequence of the choice depends on what the other prisoner chooses

Question 14

Nash equilibrium

Answer 14

Concept in game theory which describes the optimal strategy for all players, whilst taking into account what opponents have chosen
They cannot improve their position given the choice of the other
It essentially sums up the interdependence between firms when making decisions in an oligopoly

Question 15

Types of price competition

Answer 15

Price wars
Predatory pricing
Limit pricing

Question 16

Types of non- price competition

Answer 16

• these aim to increase the loyalty to a brand, which makes demand for a good more price inelastic
• special offers
• advertising and marketing
  -improve the quality of their customer service
  -

Question 17

Price wars

Answer 17

A price war is a type of price competition, which involves firms constantly cutting their prices below that of its competitors

Question 18

Predatory pricing

Answer 18

Predatory pricing is illegal
It involves firms setting low prices to drive out firms already in the industry
In the short run, it leads to them making losses
As firms leave, the remaining firms raise their prices slowly to regain their revenue
They prove their goods and services below average costs

Question 19

Limit pricing

Answer 19

Not necessarily illegal
Low prices discourage the entry of other firms, so there are low profits
Ensures the price of a good is below that which a new firm entering the market would be able to sustain