4.1.5.5 Oligopoly Flashcards
What are the key characteristics of oligopoly?
Few dominant firms
High barriers to entry
Product differentiation
Interdependence between firms
Non-price competition
How is market concentration measured?
Using concentration ratios - the combined market share of the top firms.
e.g., 4-firm concentration ratio of 72.8% in UK supermarkets.
What does a high concentration ratio indicate?
Less competition - few firms control most of the market.
What is collusive vs non-collusive oligopoly?
Collusive: Firms cooperate (formally/informally) to restrict competition
Non-collusive: Firms compete independently
What are types of collusion?
Overt (formal agreements - illegal)
Tacit (unspoken coordination)
e.g., price leadership.
What is the kinked demand curve model?
Shows price rigidity in oligopoly:
If ↑price: rivals don’t follow → big sales loss (elastic)
If ↓price: rivals match → small sales gain (inelastic)
Why do oligopolies use non-price competition?
To:
Build brand loyalty
Avoid price wars
Differentiate products
Make demand more inelastic
What is a cartel?
Formal agreement between firms to fix prices/limit output.
e.g., OPEC. Illegal in most countries.
What is price leadership?
When dominant firm sets price and others follow (form of tacit collusion).
Why are oligopolies interdependent?
Each firm’s decisions affect others’ market position → must consider rivals’ reactions.
How does game theory apply to oligopoly?
Prisoner’s Dilemma shows:
Incentive to cheat on collusion
Nash equilibrium (optimal strategy given others’ choices)
Uncertainty in decision-making
What are advantages of oligopoly?
Potential for innovation (supernormal profits fund R&D)
Economies of scale → lower costs
Product differentiation → consumer choice
Industry standards collaboration
What are disadvantages of oligopoly?
Higher prices (allocative inefficiency)
Potential collusion → reduced consumer welfare
X-inefficiency (lack of cost control)
Barriers to entry limit competition
Why do price wars occur?
When firms aggressively undercut each other’s prices to gain market share.
e.g., UK supermarkets.
What are common barriers to entry in oligopoly?
Economies of scale
Brand loyalty
High startup costs
Control of key resources
How does the kinked demand curve explain price stability?
Firms avoid changing prices because:
Raising prices loses customers
Cutting prices triggers retaliation with little gain
What is the Nash Equilibrium?
Where no firm can improve its position by unilaterally changing strategy (given others’ choices).
Why might collusion be unstable?
Incentive to cheat (like Prisoner’s Dilemma) - firms can gain by secretly undercutting agreed prices.
How do oligopolies achieve dynamic efficiency?
Supernormal profits allow investment in R&D and innovation.
e.g., pharmaceutical industry.
Why are oligopolies productively inefficient?
Don’t produce at lowest point on AC curve due to lack of competitive pressure.
What is the difference between cooperation and collusion?
Cooperation: Legal collaboration (e.g., research partnerships)
Collusion: Illegal anti-competitive agreements
How do oligopolies compare to perfect competition?
Less efficient (P>MC, not at min AC) but more innovative and differentiated products.
What real-world examples demonstrate oligopoly?
UK supermarkets (Tesco, Sainsbury’s etc.)
Mobile networks
Airlines
Car manufacturers
Why might governments intervene in oligopolies?
To:
Prevent collusion/price-fixing
Protect consumer welfare
Ensure competition
Monitor mergers
