3.6 Oligopoly Flashcards
What are the features of an oligopoly?
- Only a few large firms in the market
- Can exploit consumers by charging higher prices
- Barriers to entry exist, often in the form of advertising
- Makes it even more difficult for small firms to enter the market
Why do oligopolies tend to not compete on price?
- Need to take into account the reaction of competitors when making decisions, for example: cutting prices results in lower income for all
- Therefore firms are unlikely to lower prices as a long term strategy
Why in oligopolistic competition do firms collude with each other?
- Brings them closer to a monopoly
- Leads to profit maximisation
- Deemed to illegal in most parts of the world
Why in oligopolistic competition would firms cooperate?
- Public’s best interest
- Could join together to create a new product
What is a cartel?
- A cartel is a formal agreement between firms to collude in the operation of the market
- This will normally take the form of price fixing
- It may involve fixing output levels
- Cartels allow member firms to operate closer to conditions of monopoly
Why does the market of collusion look the same as the competition in a monopoly?
Colluding allows them to act like a monopoly
Why does a non-collusive oligopoly have a kinked demand curve?
Price elasticity of demand differs when prices rise or fall
Above P price will be price elastic and below P price inelastic
What factors do oligopolies tend to compete on?
Product differentiation and advertsing
Why are firms interdependent in oligopolistic competition?
As the actions of one firm will impact on other firms in the industry
Interdependence creates uncertainty as firms are unsure of how competitors will react to their policies and whether they will be proactive in the market
