3.4.4 Oligopolys Flashcards
What is a concentration ratio?
The collective market share of the largest firms in the industry
What does ‘n’ stand for in terms of a concentration ratio?
N is the total number of firms
What is an oligopoly market?
A market where there is a high concentration ratio, few firms dominate the market
What market ratio can we use to define an oligopoly?
7 firms with 70% of the market share
What are the 6 characteristics of an oligopoly market?
1) few firms dominate the market
2) differentiated goods
3) high barriers to entry/exit
4) interdependence of firms
5) non-price competition
6) profit max is not always the objective
In an oligopoly market, what are examples of the high barriers to entry and exit?
Example = start up costs, economies of scale, brand loyalty
What does the term interdependence mean?
Firms do not make decisions on their own, the think about what their rivals are going to do
What are examples of non-price competition?
Examples = branding, quality, advertisements, service e.c.t
What does the kinked demand curve help us understand about oligopoly’s and their behaviour?
Interdependence that leads to price rigidity
Above the equilibrium point of P, what is the PED of consumers?
Price elastic
When a firm raises their price, what happens to quantity demanded for the firm and why?
When the price rises to P2, quantity demanded falls drastically to Q2. This symbolises the interdependence of firms. Because consumers have an elastic PED, others firms in the market will not raise their price above P1, meaning consumers will quickly switch to the firms that have not raised their price, causing price rigidity
What is the result for the firm if an oligopolist raises their price past P?
A fall in market share and total revenue
Below the equilibrium point, what is the PED of consumers?
Price inelastic
When a firm reduces its price, what happens to quantity demanded for the firm and why?
When the price falls to P3, the firm move onto price inelastic point on the curve. However, quantity demanded only moves to Q3, a lesser proportion. This is because other firms will follow suit, hoping to protect their market share, this is why it is price inelastic.
What are the implications for a firm when they reduce their price in an oligopoly market?
A price war will ensue, leading to a loss of total revenue. There is no change in market share
What does a vertical gap in the MR lead to for an oligopolist in terms of cost?
If costs change, from MC to MC1, within the vertical gap, a profit maximisation oligopolist will always charge a price of P
With reference to the vertical gap in the MR curve, why do firms not need to change their price?
Because as longs as costs fluctuate in the vertical gap, there is no incentive to change price which is explained with the kinked demand curve and elasticities
With the game theory model, what is one thing you have to remember?
That firm A, is on the left of each box
If firm B decides to charge £1, what should firm A do?
Should charge 90p and undercut firm B, making profit of £4m compared to £3m
If firm B decides to charge 90p, what should firm A do?
Firm A should follow and charge 90p as firm B did, earning £1m profit
If firm A charges £1, what should firm B do?
Firm B should undercut firm A, charging 90p and make £4m of profit
If firm A charges 90p, what should firm B do?
Match firm A and charge 90p, making £1m profit
How do you solve the prisoners dilemma?
By finding a cell with the same number in, this is the nash equilibrium
