3.4.4 Oligopoly Flashcards
Oligopoly
Few firms dominate the industry.
Characteristic of oligopoly: interdependence of firms
Oligopolistic firms are highly aware of the actions and decisions of their competitors. They must consider how their own choices, such as pricing and marketing strategies, will affect the behaviour and reactions of rival firms.
Characteristic of oligopoly: high concentration ratio
Oligopolies are characterized by a small number of large firms dominating the market. The concentration ratio measures the market share held by the largest firms in the industry, and in oligopolistic markets, this ratio is typically high.
Characteristic of oligopoly: high barriers to entry and exit
Oligopolistic markets often have significant barriers that prevent new firms from entering the industry or existing firms from easily exiting. These barriers can include high capital requirements, economies of scale, patents, and government regulations.
Characteristic of oligopoly: product differentiation
Oligopolistic firms often engage in product differentiation to distinguish their offerings from competitors. This can include branding, quality variations, and advertising to create brand loyalty.
Calculation of N-Firm Concentration Ratios
Total size of n-firms/Total size of market *100
Significance of N-Firm Concentration Ratios
- Higher concentration ratios indicate a more concentrated industry with fewer dominant firms.
- Lower concentration ratios suggest a more competitive industry with a greater number of smaller firms
- It can provide insights into the degree of market power held by the largest firms and potential antitrust concerns.
Collusive behaviour
Collusion is when firms form collective agreements that reduce competition. A form of anti-competitive behaviour.
Example of collusion
In August 2015, Pfizer and Flynn Pharma found to have charged “excessive and unfair” for an anti-epilepsy drug - phenytoin sodium - inflating the annual NHS drug bills by tens of millions of pounds.
Reasons for collusive behaviour: maximise profits
If firms engage in collusive behaviour they are able to achieve monopoly-like profits by eliminating competitive profits.
Reasons for collusive behaviour: reduces uncertainty
Firms that engage in collusive behaviour removes the fear of engaging in price cutting, or ‘price war’.
Non-collusive behaviour
Non-collusion is when firms compete with each other.
Reasons for non-collusive behaviour: legal constraints
Antitrust laws and regulations prohibit collusion, encouraging firms to compete independently.
Reasons for non-collusive behaviour: differences in business objectives
Firms may have differing goals and incentives that make collusion difficult e.g. building and maintaining market share.
Overt collusion
Firms cooperate with explicit agreements. Firms may form cartels, where a group of firms who enter into agreement to mutually set prices.
Tacit Collusion
Firms cooperate without an explicit agreement. Firms may engage in price leadership, where one dominant firm sets a price and others follow suit.
Price competition
Competition that is based on price.
Types of price competition: price wars
Firms react to another firms price cuts by cutting their own prices.
Types of price competition: predatory pricing
Firms make short-term losses to force firms out of the market.
Types of price competition: limit pricing
Firms set low prices to deter new entrants into the market.
Non-price competition
Competition that is not based on price.
Types of non-price competition: advertising
This creates an awareness of the company/product and can persuade a customer to purchase the product. If advertising is successful, it can increase sales and market share for a business which in the long run can increase profits.
Types of non-price competition: customer service
Firms may offer exceptional customer service and support as a competitive advantage. This will encourage loyalty amongst customers and give the
business a more positive reputation.
Types of non-price competition: loyalty cards
These encourage repeat purchases by rewarding customers for their
loyalty.
