5.3 Oligopoly Flashcards
characteristics of an oligopoly
high barriers to entry and exit
interdependence of firms
Product differentiation
Why are there high barriers to entry and exit in an oligopoly
To make the market less competitive
How are firms interdependent in an oligopoly
The actions of one firm affect another firms behaviour
How do firms differentiate their products in an oligopoly
Using branding
What is collusive behaviour
When firms agree to work together o something e.g. Set a price or fix quantity of output
What does collusion lead to
A lower consumer surplus
High prices
Greater profits
What does collusion allow
Oligopolistic to act like a monopolist and maximise their joint profits
Why is collusion more likely to happen where there are only a few firms
Because they face similar costs
high barriers to entry
Its hard to be caught
When does non collusive behaviour occur
When firms are competing
What is overt collusion
When a formal agreement is made between firms
Works best when there is only a few dominant firms
Where is overt collusion illegal
EU and US
What is tacit collusion
When there is no formal agreement but collusion is implied
What is an example of tacit collusion
The uk supermarket industry
Firms are competing in a price war
What does the kinked demand curve show
The feature of price stability in an oligopoly
What does the kinked demand curve assume
Other firms have asymmetric reaction to a price change by another firm
What is a cartel
A group of two or more firms which have agreed to control prices, limit output or prevent new firms coming into the market
What is a famous output of a cartel
OPEC - fixed their output of oil and controlled 70% of oil supply in the world
What do cartels lead to?
Higher prices
Restricted outputs
What is price leadership
When one firm changes their price and other firms follow
Why are other firms often forced to change their prices?
Otherwise they will risk losing out on market share
What explains price stability within an oligopolistic market?
The risk of firms losing market share if they dont follow price change
What is a price war
Involves firms constantly cutting prices beneath their competitors
One cut leads to another
UK supermarket
Disadvantages of oligopoly
High prices and profits lead to misallocation of resources
If firms collude there is a loss of insurer welfare
Advantages of oligopoly
They can earn significant profits which can lead to more innovation and invention
Higher profits can be a source of government revenue
Industry standards can improve
