3.4.4 Oligopoly

Question 1

How is an oligopoly characterised ?

Answer 1

1) few large sellers
2) high barriers
3) differentiated goods
4) interdependence

Question 2

Explain the first two characteristics of an oligopoly

Answer 2

1) For instance, in the fizzy drinks market Pepsi and Coca Cola dominated the fizzy drinks market.
2) the high barriers including the companies brand loyalty to their company make it impossible for firms to copmete.
Another barrier to entry is the huge sunk costs. For instance, millions spent on advertising and the R and D of new recipe. New firms will see this as a high cost of failure and deter them from joining

Question 3

Explain the last two chracteristics of an oligopoly

Answer 3

3) all goods must be similar but slightly diferent.

4) One firm actions can directly affect another firm

Question 4

Why is it that in corner shops prices of fizzy drinks are similar ?

Answer 4

This is because fizzy drinks market is oligopolistic and interdependent. One firm’s actions will directly affect the other

Question 5

What does an oligopolistic firm need to do when setting its price ?

Answer 5

they need to think about their competitors behaviour and price their competitors will set the price at

Question 6

How do economist choose what price firms should set their good at ?

Answer 6

game theory

Question 7

How do you draw out the game theory ?

Answer 7

First you draw out the two firm’s strategies being high price and low price.
pay off from left firm represents the left firm and vie versa.

Question 8

What is the inevitability of price wars ?

Answer 8

Both firms will have incentives to try to undercut with lower prices and bring price down. Make little profit

Question 9

What does collusion mean ?

Answer 9

This is when 2 or more firms agree to limit competition (normally through prices to avoid price wars)

Question 10

What are the two types of collusion ?

Answer 10

Overt and tacit collusion

Question 11

What is overt collusion ?

Answer 11

This is when there is a formal agreement between firms. Two firms communicate with each other

Question 12

Who have made overt collusion illegal ?

Answer 12

The CMA. the competition and markets authority. They do not like it because it avoids competition and keeps prices high. This overt collusion would be kept hidden to avoid fines

Question 13

What is tacit collusion ?

Answer 13

This is when there is unspoken agreement between firms

Question 14

Why would firms both keep prices the same ?

Answer 14

they know if they reduce prices this will start a price war and lose profits, An increase in price will also lose customers

Question 15

What are the three types of price competition ?

Answer 15

Price wars, predatory pricing, limit pricing

Question 16

What are price wars ?

Answer 16

This is when firms try to undercut each other with lower prices to try and gain each others customers. This is dangerous as supernormal profit will go down

Question 17

What is predatory pricing ?

Answer 17

This is when a firm aggresively cuts its price below AVC to force out competitors. Setting price below AVC, below its short run point will make a loss in the short run. In the long run however they get rid of competitiion and brings prices back up

Question 18

What is limit pricing ?

Answer 18

This is when an incumbent firm sets prices low enough so other firms would not be able to enter. They can use economies of scale to keep costs and prices low. Acts as a barrier to entry

Question 19

What are the 4 types of non price competition ?

Answer 19

Adveritising, loyalty cards, branding, quality

Question 20

Explain the first 2 types of non price competition

Answer 20

Advertising can help steal competitors customers without changing prices. For example advertising new features the other does not have

Loyalty cards can entice customers with their cards. Keeps loyal customers with free goods

Question 21

Explain the last 2 types of non price competitive

Answer 21

Firms will use a certain trademark as a strong brand for their companies. for example, nike tick

Firms compete on quality of goods. Invest in Research and development increasing dynamic efficiency and improve product quality