3.4.4 Oligopoly part 1

Question 1

Define concentration ratio

Answer 1

Measures the proportion of an industry’s output or employment accounted
for by the largest firms. When the concentration ratio is high, an industry has
moved towards a monopoly, duopoly or oligopoly. Share can be by sales,employment or any other relevant indicator.

• or it measures the market shares of the largest firms in the industry

Question 2

How do you calculate the n firm concentration ratio

Answer 2

(total sales of n firms)/(total size of market) x100

Question 3

4 key characteristics of an oligopoly

Answer 3

SPEC:
o high barriers to entry and exit
o high concentration ratio
o interdependence of firms
o product differentiation

Question 4

What is an additional barrier to entry in oligopoly?

Answer 4

high start up costs associated with developing a new/differentiated product

Question 5

Define oligopoly by market structure

Answer 5

A market dominated by a few producers, each of which has control over the
market through high barriers to entry and also sell differntiated products

Question 6

Define oligopoly by conduct

Answer 6

Oligpoly is a market in which firms are interdependent therefore firms respond to this interdependence with a competitive or collusive strategy

Question 7

Describe oligopoly interdependence

Answer 7

• decision made by one firm affect other firms in the industry
• if one firm changes behaviour, it changes demand curve for others
• so other firms are aware of actions of rivals leading to strategic behaviour so firms try to anticipate and prepare for rival actions

Question 8

Define collusion

Answer 8

refers to an agreement between firms to limit competition, increase monopoly power and increase profits through price-fixing agreements (prices fixed at a levelor raising it by a fixed amount)

Question 9

Why do firms in oligopolie face conflicting incentives

Answer 9

• aim is to profit maximise
• can either do this by collusive or competitive behaviour
• conflicting incentives between both possible choices bc collusive reduces uncertainty about rival behaviour and maxs profit on industry level by comp behaviour can increase a firms profits at expense of others

Question 10

Define informal collusion

Answer 10

aka tacit collusion:
Where firms undertake actions that are likely to minimize a competitive response, e.g. avoiding price cutting or not attacking each other’s market. When firms co-operate but not formally, e.g. price leadership, or quiet or implied co-operation, secret, unspoken cooperation

Question 11

Define strategic behaviour

Answer 11

Decisions that take into account the market power and reactions of other
firms.

Question 12

Define price leadership

Answer 12

When one firm has a clear dominant position in the market and the firms with
lower market shares follow the pricing changes prompted by the dominant
firm

Question 13

Define cartel

Answer 13

An association of businesses or countries that collude to influence production levels and thus the market price of a particular product. Recognised by a formal agreement aimed to limit comp and increase profit
- formal collusion

Question 14

Define overt collusion

Answer 14

Formal and open agreements between firms to undertake actions that are likely to minimise a competitive response. This is illegal in most economies

Question 15

Factors affecting difficulty in establishng cartels;

Answer 15

• incentive to cheat
• cost difference between firms
• number or firms
• possibility of a price war
• recessions
• potential entry into the industry
• industry lack a dominant firm; price leader

Question 16

How does incentive to cheat affect cartels being established

Answer 16

• there is the incentive to cheat in a cartel by secretly offering lowering prices for some buyers to icrease their own market share and profits above rivals, so cartel collapses

Question 17

How do cost differences affect cartels being established

Answer 17

• each firms has diff costs and thus diff cost curves and since price agreed is common to all firms, firms with higher AC get lower profits and vice verse so it is hard to agree a common price and quantity

Question 18

How does number of firms affect cartels being established

Answer 18

larger the number of firms, more difficult to arrive at an agreement on price and allocation of output as there a greater number of differing views and more compromising needed

Question 19

How does possibility of a price war affect cartels being established

Answer 19

price war results from cheating ; a price cut is matched by a retaliatory price cut by other firms making all firms collectively worse off with lower price and profits

Question 20

How do recessions affect cartels being established

Answer 20

during recessions, sale fall and profits are reduced so there is a stronger incentive to cheat endangering survival of the cartel

Question 21

How do barriers to entry affect cartels being established

Answer 21

• successful cartels make large SNPS encouraging new firms to enter the industry but increased industry supply drives price down, cutting into cartel SNPs so long run survival depends on high barriers to entry

Question 22

How does price leadership affect cartels being established

Answer 22

• dominant firm is needed to reach and agreement in negotiations e.g Saudi Arabia is the leader of OPEC, a legal cartel of 13 oil producing countries which aim to increase world oil price by cutting back on total output. each member is assigned an output level

Question 23

How do cartels assign output levels to members,

Answer 23

• same SNP as monopoly diagram, divide quantity by agreeing on wha share of the market each firm will have based on historical market shares

Question 24

What are reasons for collusive and non collusive behaviour

Answer 24

• reasons for difficulty in establishing a cartel are essentially reasons for non collusive behaviour and vice versa

Question 25

Why do similar goods promote comeptitive behaviour

Answer 25

• homogenous goods
• firms won’t have price making power to fix prices

Question 26

Why does consumer inertia and consumer loyalty promote collusive behaviour

Answer 26

• if you lower prices, these two factors means you won’t gain any extra demand but instead just lower profits earnt.

Question 27

How to evaluate competitive oligopoly

Answer 27

• use pros and cons of a competitive market
• IT HAS AE, XE, PE
  -but not dyanmic efficiency, EOS

Question 28

How to evaluate collusive oligopoly

Answer 28

• use monopoly pros and cons
• DE but not XE, AE, PE
• diseconomies of scale and eos possible