3.4.4 - Oligopoly Flashcards
What Is An Oligopoly?
(3 Points)
~ Imperfect competition.
~ Few large firms dominate the industry, with each firm having significant market power.
~ E.g. Airlines, Smartphones, Soft Drinks and Supermarkets.
What Are The Characteristics Of Oligopoly?
(8 Points)
~ Few firms dominate the market, high concentration ratio.
~ Differentiated goods.
~ Firms are price makers.
~ High barriers to entry and exit.
~ Interdependence, firms are dependent based on actions and reactions of rival firms.
~ Price rigidity.
~ Lots of non-price competition, due to price rigidity.
~ Profit max is not the sole objective firms, due to interdependence.
What Does The Kinked Demand Curve Illustrate?
(3 Points)
~ Interdependence.
~ Firms don’t want to change prices.
~ Firms don’t need to change prices.
Draw The Kinked Demand Curve & Explain It
(8 Points)
Theory (Don’t Want To Change Price):
~ Around P1, there are differing elasticities of demand.
~ Above P1 -> Elastic, Below P1 -> Inelastic.
~ If a firm raises its price, there would be a fall in demand (Elastic), as other firms will not follow this move.
~ If a firm reduces its price, demand will increase by less than the reduction in price (Inelastic), other firms will then follow to protect their market share and competitiveness.
~ As firms follow it may lead to price wars.
Theory (Don’t Need To Change Price):
~ If costs increase within the MR gap, and the oligopoly is a profit maximiser.
~ They will always be charging a price of P1.
~ As the quantity is always Q1.
~ Meaning if costs were to rise, firms wouldn’t need to change their price.
What Are Conclusions That Can Be Made From The Kinked Demand Model?
(3 Points)
~ Some Price Competition -> Firms may reduce price to gain market share, leading to price wars.
~ Lots Of Non-Price Competition -> Prices are rigid, meaning more non-price competition.
~ There Is A Temptation To Collude -> Meaning colluding together, to break interdependence and non worrying what rivals are doing.
What Is A Concentration Ratio?
(4 Points)
~ Collective market share of the largest firms in an industry.
~ In The Form Of -> N : Total market share.
~ N = Number of firms.
~ Always ignore ‘others’.
What Is Game Theory?
Maps interdependence, to a higher extent than the kinked demand curve.
Describe This Oligopoly Game Theory
(4 Points)
~ Left number, profit for firm on the left.
~ Right number, profit for firm on the left.
~ If firm B charges £1, firm A would charge 90p and make £4 million profit. Vice versa for everything.
~ Game is solved, when there is two underlined numbers, E.g. $1m and £1m -> 90p (Nash Equilibrium).
What Is Meant By ‘Nash Equilibrium’?
Rational equilibrium that can last in the long term.
What Are The Conclusions Of Game Theory?
(3 Points)
~ Price Rigidity -> As outcomes wouldn’t change, as firms have developed a dominant strategy, they will compete on non-price competition.
~ Temptation To Collude -> Not best outcome for both firms, collusion means both firms can make SNP as a cartel.
~ Incentive To Cheat On Collusive Agreement -> Undercut the rival, which is why collusion cannot last in the long term.
What Are Types of Non-Price Competition?
(4 Points)
~ Advertising.
~ Quality.
~ Branding.
~ Customers service.
What Are Types Of Price Competition?
(3 Points)
~ Price wars, cutting price repeatedly to gain higher market share.
~ Predatory pricing, established firm charges low price to push competitors out and then charge higher prices.
~ Limit pricing, firms charge low prices to prevent new entrant from joining.
What Are The 2 Types Of Oligopoly?
~ Competitive.
~ Collusive.
What Is A Competitive Oligopoly?
(2 Points)
~ Compete on price factors, leading to price wars.
~ Compete on non-price factors.
What Factors Promote A Competitive Oligopoly?
(5 Points)
~ Large number of firms, disincentivises collusion.
~ If new market entry is possible, takes away incentive of collusion.
~ One firm with significant cost advantage, hard to fix price.
~ Homogenous goods, no price making power to fix prices.
~ Saturated market, lots of price competition to snatch market share.
What Is A Collusive Oligopoly?
(4 Points)
~ Overt collusion -> firms get together to fix prices or quantities, and is illegal. (Formal agreement).
~ Cartel (Overt) -> groups of firms join together to limit output and raise prices.
~ Tacit collusion -> not engaging in price wars. (Informal agreement).
~ Price leadership (Tacit) -> firms follow the pricing decisions of this company.
What Factors Promote A Collusive Oligopoly?
(4 Points)
~ Small number of firms, more collusion as its easy.
~ Similar costs, easy to fix prices and quantities.
~ High barriers to entry, SNP will not attract new entrants, longer benefits of collusion.
~ Ineffective competition policy, get away with collusion.
