3.4.4: Oligopolies

Question 1

What are the characteristics of oligopolies?

Answer 1

• Few firms dominate the market
• Interdependence
• High concentration ratio
• Differentiated goods, so price makers and non-price competition
• High barriers to entry/ exit
• Profit max not sole objective
• Price rigidity
• Possible collusion
• Supernormal profits in the LR

Question 2

What is concentration ratio?

Answer 2

• Refers to the combined market share of the top few firms in a market.

Question 3

What are the different interpretations of the percentages in concentration ratio?

Answer 3

• 0%: No concentration, meaning perfect competition
• 1% to 50%: Low concentration meaning monopolistic competition
• 51% to 80%: Medium concentration meaning monopolistic competition/ oligopoly
• 81% to 100%: High concentration meaning oligopoly/ monopoly

Question 4

What are the two main types of oligopolies?

Answer 4

• Non- collusive
• Collusive

Question 5

What are the characteristics of a non collusive oligopoly?

Answer 5

• Engage in price wars or non price competition
• When there are lots of firms in market (low concentration)
• Lower barriers so firms attracted to SN- contestable market.
• More like a competitive market

Question 6

When does collusion occur?

Answer 6

• Occurs when rival firms agree to work together- eg setting higher prices in order to make greater profits.

Question 7

What are the characteristics of collusive oligopolies?

Answer 7

• Horizontal vs vertical
• Can be overt (publicly) or tacit (discreetly)
• Fix prices high to reduce competition and maximise profits.
• Fix the output to keep supply at a certain level
• Higher barriers to entry
• Ineffective competition policy
• Small no. of firms dominating

Question 8

What are the advantages of collusion?

Answer 8

• Excess profits could be reinvested to improve dynamic efficiency in the LR (or higher dividends)
• Firms can collaborate on technology and improve their goods/ services
• Saves on duplicate research
• Increase in size of EoS- lower prices

Question 9

What are the disadvantages of collusion?

Answer 9

• Less consumer welfare as prices are raised and output reduced.
• Efficiency falls as less competition which would increase average costs.
• Makes it tougher for new firms to enter

Question 10

What is game theory?

Answer 10

• Game theory is related to the concept of interdependence between firms in an oligopoly

Question 11

What are the types of price competition?

Answer 11

• Price wars
• Predatory pricing- make a loss in the SR to drive our competition then increase.
• Limit pricing- keeping prices low enough so new competitors can’t compete.

Question 12

Who are the winners in price wars?

Answer 12

• regular consumers
• Managers due to higher sales

Question 13

Who are the losers of price wars?

Answer 13

• Shareholders due to lower profits
• Suppliers as they may get pressured.

Question 14

How is n- firm concentration ratio calculated?

Answer 14

• By adding the percentages of market share for the firms
• Or using total sales of n firms/ total size of market x 100

Question 15

What is collusion?

Answer 15

• Collusion is when firms make collective agreements that reduce competition

Question 16

Competition Evaluation

Answer 16

• If firms compete, they know lowering prices to gain new customers is likely to cause other firm to lower their prices.
• However, if they work together, they could maximise industry profits