3.4.4 - Oligopoly part 2 Flashcards
3 types of price competition
o price wars
o predatory pricing
o limit pricing
Define price war
Vigorous competition between businesses often in a short-term battle for market share and increased cash-flow.
Define limit pricing
This is a pricing strategy, where products are sold by a supplier at a price low enough to make it unprofitable for other players to enter the market. It is used by monopolists to discourage entry into a market, and is illegal in many countries.
Two ways a cartel can operate
agree on a price for the goods and then
compete freely using non-price competition to maximise their market share; or agree
to divide up the market according to the present market share of each business.
Define predatory pricing
The pricing of goods or services at such a low level that other firms cannot compete and are forced to leave the market. This activity is illegal in many economies
- only works when a firm is large enough to have a low price and sustain losses, they can put price back up after firms leave
When do price wars occur and give a common example
These occur in markets where non-price competition is weak ; where goods have
weak brands and consumers are price conscious. They also occur when it is difficult
to collude.
- supermarkets use price wars, trying to offer lower price
Describe types of non-price competition
- advertising: raise awareness, increase sales and market share therefore LR profits rise and even make demand more inelastic
- loyalty cards: tesco clubcard - encourage repeat purchase and brand loyalty
- branding: strong brand image that is recognsied and adds value bc of quality associated so brand loyalty
- quality: good rep and positive reccs, loyalty
- customer service: loyalty
- product development: invest in this, get comp advantage over rivals
ALL VERY EXPENSIVE WITH NO GUARANTEE OF SUCCESS. Soft drink market has lots of on-price cop but pepsi advert was controverisla due to trivialising BLM , so lost sales
Game theory meaning
A “game” happens when there are two or more interacting decision-takers
(players) and each decision or combination of decisions involves a particular
outcome (this is known as a pay-off.)
Define interdependence
When the actions of one firm has an effect on competitors. A feature of oligopoly. When two or more things depend on each other (i.e. business and society).
Define non-price competition
Competing not on the basis of price but by other means, such as the quality of the product, packaging, customer service or some other feature.
Define nash equilibrium
In a Nash Equilibrium, the outcome of a game that occurs is when player A takes the best possible action given the action of player B, and player B takes the best possible action given the action of player A.
Apply the soft drinks market to oligopoly idea
pepsi: 22%, coca cola: 49%, other 29%
-always only use individual firms
Energy market oligopoly
British Gas, EDF Energy, E.ON, Npower, Scottish Power, and SSE
In 2010, the Big Six held 100 percent of the domestic electricity supply market in the UK.
- promote a more competitive market, the British energy regulator, Ofgem, enacted a series of market reforms aimed at increasing access for smaller players.
- The past decade has seen a significant number of domestic customers switching from large electricity suppliers to small and mid-tier suppliers, causing the Big Six’s market share to dip below 75 percent in 2022
Define kinked demand curve
The kinked demand curve model assumes that a business might face a dual demand curve for its product based on the likely reactions of other firms in the market to a change in its price or another variable.
What are the two assumptions of the kinked demand curve
- if a firm raises its prices, other firms will not raise theirs
- if a firm lowers its prices, other firms do the same
