5.7 Oligopoly Flashcards
What does oligopoly mean?
A few in greek(not really relevant but gives an idea)
Wha is a concentration ratio?
Measures the market share of the biggest firms in the market e.g
A 5 firm concentration firm means the aggregate market share of the 5 largest firms
What is market conduct?
The pricing and marketing policies perused by firms.
Also known as market behaviour, but it is not confused with market performance (that refers to the end result of these polices)
What is oligopoly defined as?
The market structure or the number of firms in the market
What concentration of the 5 biggest firms is needed for an oligopoly?
60% concentration ratio
How does an oligopolistic firm affect its rivals?
-through price
-through output decisions
(But it’s own profit can be affected by how rivals behave and react to a firms decisions)
If a firm decreases price in order to boost profit and increase market share it depends on?
The reaction and actions taken by rivalling firms
When does a competitive oligopoly exist?
When the rival firms are independent in the sense that they must take into account the reactions of other firms when forming a market strategy but also decide their strategies without co-operation
What is a key characteristic of an competitive oligopoly?
Uncertainty
Why is uncertainty a key feature of a competitive oligopoly?
Firm can never be completely certain of how rival firms will react to price changes, marketing and output strategies
What is a non-collusive oligopoly?
Firms act independently and don’t form agreements with each other
What happens in a collusive monopoly?
A cartel is formed (or price ring)
Why do firms collude and create a cartel?
To reduce uncertainty
What happens in a cartel?
Firms agree to all set prices at a highly inefficient price to keep an inefficient firm (firm E) in the market)
What are the key characteristics of an oligopoly?(5 asp)
-each firm supplies a branded product
-independent decision making from other firms
-intensive non price competition (especially branding)
-price rigidity
-firms may decide to collide to set prices
What is joint profit maximisation?
When a number of firms act as a single monopolist yet keep their separate identities
(Occurs as firms believe they can make higher profits)
What is a quota?
fixed share of something that a person or group is entitled to receive or is bound to contribute
Diagram for joint-profit
What is a cartel?
A collusive agreement by firms usually to fix prices (sometime an agreement to restrict our out or set up barriers to prevent other firms from entering the market
Why are cartels bad for consumers?
Usually illegal and judged to be anti-competitive against the public interest
What forms of a cartel would be in the public interest?
Joint product development
What are the types of collusion?
Overt
Tacitly
Horizontal
Vertical
What is overt collusion?
Open collusion
What is tacitly collusion?
Secret collusion
What is horizontal collusion?
When firms in the same industry join together
What is vertical collusion?
Supply chain when supply-outlet
What are the 3 main aims of collusion?
Joint profit maximisation
Lower cost of competition
Reduces uncertainty in the market
When is collusion legal?
If it contributes to improvement the production or distribution of a good or promoting technical progress in a market
What are 4 conditions for price collusion?
-weak industry regulators
-low penalties for collusion
-output is easily measurable in an industry
Participating firms have a high % of total sales
What are 3 reasons why cartels break down?
CMA
Falling market demand
Whistle blowing firms(exposure of price fixing)
What are 2 costs of collusion?
Damages consumer welfare
-reinforces cartels monopoly power
What are two benefits of collusion?
General industry standard bring social benefits
Fairer prices for producer cooperatives I lower and middle-income nations
How is the MC curve of a cartel calculated?
All of the MC curves of the firms in the cartel added together
Kinked demand curve diagram
Describe the kinked demand curve?
Oligopolist initially produced output Q1 and charges price P1
(Firms don’t actually know what the AR curve is as it is an estimate)
When price increases from p1 to p2 is elastic as competitors will not increase the price -inelastic
-decreasing price to p3 will is more elastic as rivals are expected to react and lower their prices
Why are there two different demand curves on a kinked demand curve?
Different assumptions on how rivals will react to price changes
Developed theory of the knifed demand curve diagram
Describe this diagram
If the firms is at MC1 it intersects MR at point A(MC can rise and fall in the vertical section of MR with the output being Q1)
-if marginal cost rises above MC2 or fall below MC3 the profit maximising output changes
What are the criticisms of the kinked demand curve theory?
It is incomplete as it doesn’t state why a es to be at the point X
-research suggests oligopoly prices tend to be stable
-little evidence provided by real world pricing decisions to support the theory
What are the advantages of an oligopoly(3 asp)
-benefits from encounters of scale(like a monopoly-more dynamically efficient)
-continuous innovation due to competition
-east for consumers to compare products with a few firms in the market
What are the key disadvantages of an oligopoly?
-restrict output and raise prices
-possibility of cartels(bad market structure for consumers)
-small competitive firms may find it difficult to enter the market
-producer ends up ‘being king’ like in a monopoly
What is a price war?
Occurs when rival firms continuously lower prices to undercut each other
What is a key example of covert collusion?
Price leadership
What is a price agreement?
An agreement between firms similar firms, suppliers or customers regarding the pricing of a good or service
What is price leadership?
The setting of prices in a market usually by a dominant firm, which is followed by other firms in the same market
A price agreements usually permanent or temporary?
Temporary
How does price wars benefit and hurt consumers
?
Cheaper prices in short run
More expensive in long run as firms are priced out the market
What are 3 causes of price wars in oligopoly?
Collapse of cartel
Entry of new firms (challengers)
Response to external factors(falling demand in a recession)
What is strategic independence?
One firms output and price decisions are influenced by the likely behaviour of rivals
Who loses out due to price wars?
Shareholders
Suppliers
What are satisfactory profits?
Small normal profits
What does raising prices in an oligopoly force other firms to do?
keep their prices(inelastic)
What does dropping prices in an oligopolistic market force firms to do?
Drop prices (elastic)
If the AR curve is kinked how many MC curves are there?
2(need to check why’
Do oligopolies have price setting powers?
Yes
