4.4 Oligopoly Flashcards
What is an Oligopoly?
Market structure with a few dominant firms
an example of this could be the oil industry
- shell
- bp
- supermarkets
- esso
etc
What are the characteristics of a oligopoly ?
A few dominant sellers (e.g supermarket industry)
Interdependence - because there are few dominant sellers each firm must base its decision making on what the other sellers are doing. This means each firm is dependent on the others in the market
Barriers to entry - an oligopoly must have some barriers to entry to stop new firms from being able to compete with the dominant sellers
Differentiated products - each firm is able to differentiate its product from the competitor often with branding
Non price competition - firms in a oligopoly often choose not to compete on price (as this will impact profits) and instead compete on things like branding and advertising
What are sticky prices ?
Sticky prices are the scenario in which the price of a good is slow to change despite changes in the market that suggest different price is optimal
What is the kinked demand curve ?
It illustrates an elastic response to an increase in price and an inelastic response to a decrease in price
The kinked demand curve shows that in a oligopoly STICKY PRICES are likely to occur - Diagram page 90
What is Collusion ?
Scenario in which firms work together in secret to gain an unfair market advantage
What is overt collusion ?
When is it legal or illegal ?
OC occurs when firms formally agree not to compete on price
It can be legal when achieved through JV’s and strategic alliances - e.g. airline industry
It is illegal when achieved through price fixing - e.g. Sainsburys and Asda fixed price of milk in 2007)
What is tacit collusion ?
Scenario in which firms work together without a formal agreement often by observing other firms in the market
It can lead to price leadership where the dominant firm sets the price and others follow
It often leads to sticky prices and firms not competing on price because they know every firm in the market will do the same thing (e.g. petrol market)
What is Product differentiation
Features that make one product different from its competitors. Often used when sticky prices exist in a market
How can you differentiate your products other than price ?
Branding - customers identify with the brand
After Sales service - for higher priced products firms offer warranties or credit
Extra Features - e.g. airlines offer extra leg room to try and seem different from their competitors
Performance and Reliability - e.g. a car insurance provider might differentiate itself in terms of the speed of the pay out in the event of an accident
Location - the convenience of a location - e.g. Mcdonalds often differentiates itself as being more conveniently located than other firms in the market
What are concentration ratios ?
A way of measuring the market dominance of the top few firms in the market by adding up each firms individual market share and looking at this as a % of the total market
Name 4 advantages of a oligopoly
Firms can be dynamically efficient because they feel theitr market share is protected - more profit, more innovation
Price stability in the market
Firms can gain from economies of scale reducing average costs
Supernormal profits can be reinvested, creating more jobs and new products
Name 4 disadvantages of a oligopoly
High prices for consumers due to sticky prices
Less choice for consumers
Firms not incentivized to reduce costs - may lead to X inefficiency
Firms may be so large they suffer from diseconomies of scale
Likely to be allocatively inefficient - firms are likely to make supernormal profits
