4.4 - oligopolies Flashcards
Oligopoly
An oligopoly is an industry dominated by a few large firms.
Characteristic of an oligopoly
Interdependent firms
High barriers to entry / exit
Use of non-price strategies
Product differentiation
Collusion
Rival firms working together to increase profits
How is collusion done?
Firms agreeing to raise prices
Deals to prevent market becoming more competitive
May agree to restrict supply
Overt collusion
When firms agree to raise prices / restrict output
Tacit collusion
No formal agreements, but firms watch each other closely and make moves based off the other
Strengths of an oligopoly
Fair pricing
Innovation
Economies of scale
Weaknesses of an oligopoly
Chance for collusion = no fair pricing
Do not have perfection information
Not allocatively efficient
Interdependence
Dependence of firms on their rivals to set prices / change price / take part in advertising
Concentration ratio
Reveals what percentage of market share a specific number of firms have
Concentration ratio calculation
Identify number of sales top 5/10 have (depending on measure)
Calculate percentage of sales these top firms have
Game theory
Used by firms to choose optimal decision to make
Why do firms use game theory
Make decisions on setting prices
Making decisions on advertising
