3.4.4 - Oligopoly Flashcards
What are oligopoly market characteristics?
1) a few large firms dominate
2) similar goods but branded
3) imperfect knowledge about rivals
4) high barriers to entry and exit
5) oligopolies can set price, but might price-fix to avoid competition
What is interdependent?
Oligopolies are interdependent, meaning the actions of one firm will affect the others directly, and leads to collision behaviour
Examples of non-price competition
- synergy
- marketing/advertising
- customer loyalty (vouchers, points, loyalty cards)
- false price competition
- unique selling point (USP)
Methods of non-price competition
advertising
branding
promotional strategies (BOGOF)
packaging/product quality
free gifts
loyalty cards
Competition and non-collusion
Competition = non-collusion, companies are not cheaper than rivals, and don’t compete on prices. When non-price competition breaks down this leads to a PRICE-WAR -> aggressive price cutting
Concentration ratios
For example: CR3 = 60%, CR7 = 89%
What is collusion?
(illegal) firms in an oliopoly might want to avoid price-wars by forming a cartel and COLLUDING -> firms group together to control supply and fix price of products
What is tacit collusion?
TACIT - firms do not communicate directly with eachother (copying) - often a price leader or dominant firm in the market
What is covert collusion?
firms meet secretly to fix prices and output to control the market
What is overt collusion?
firms openly fix prices and output in public
When is collusion most possible? (evaluation)
- similar costs, allow for similar pricing
- few firms, easier to share information
- high barriers to entry - supernormal profit in LR
- low levels of regulation - collusion is illegal
- homogeneity of products - no differentiation
Problems with collusion
firms have an incentive to cheat by producing more than agreed and take advantage of artificially high prices, only if other firms don’t cheat as well (GAME THEORY)
What diagram is an Oligopoly represented by?
The kinked demand theory diagram
What is game theory?
where a firm factors in other firms decisions, playing not to lose in an interdependent market (JOHN NASH)
What is the Nash equilibrium?
players reach the optimal decision by independently choosing a strategy based on other firms decisions. drawn as a payoff matrix, the Nash equilibrium is usually a draw where both players put prices low.
