3.4.4 Oligopoly Competition

Question 1

What are the characteristics of an oligopoly?

Answer 1

• high barriers to entry and exit
• high concentration ratios
• independence of firms
• product differentiation: non-price competitions to distinguish their offerings from competitors

Question 2

What is the concentration ratio?

Answer 2

It measures the combined market share of the largest firms in the industry

• ( total number of firms ) N : Total market share

Question 3

What is the significance of the concentration ratio?

Answer 3

• higher concentration ratio = more concentrated industry with fewer dominant firms
• lower concentration ratio = more competitive industry with greater number of smaller firms

Question 4

What is competitive oligopoly?

Answer 4

• price wars
• firms are seeking to cut prices and increase competitiveness

Question 5

What is interdependence of firms?

Answer 5

Firms make decisions based on the actions and all reactions of rival firms

Question 6

What is a price war?

Answer 6

• firms may engage in a price war to increase their market share

Question 7

Who gains in a price war?

Answer 7

• consumers: lower prices, higher consumer surplus
• serving firms: gain market share and increase longer term profit
• firms: may be able to use their monopsony power to depress the prices they pay to suppliers to cut costs and stop profit falling

Question 8

Who are the losers in price war?

Answer 8

• consumers: loss of choice if firm is forced to leave
• firms: lose profit in the short run
• suppliers: may lose profit if they cannot charge such high prices

Question 9

What is predatory pricing?

Answer 9

• involves cutting prices below the average costs of production
• its a short term measurement - once rival firms are forced out the market they raise prices again
• this is illegal

Question 10

What is limit pricing?

Answer 10

• involves cutting the price to the point that deters new firms from entering the market