5.7 Oligopoly Flashcards

1
Q

what are the features in an oligopoly market structure?

A

few firms dominate the market (high concentration ratio)

differentiated goods

firms are price makers

high barriers to entry/exit

Interdependence (firms rely on one another)

Price rigidity (stable)

Non price competition (high expenditure on marketing costs, quality competition, brand imaging etc.)

Profit maximisation not sole objective due to interdependence (we don’t know objective could be sales, rev who knows)

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2
Q

examples of oligopolies

A

UK= supermarket industry, industry, bus, airline markets

Worldwide= soft drink companies (Pepsi and coke)

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3
Q

what diagram can be used to illustrate oligopoly?

A

kinked demand curve

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4
Q

how does kinked demand curve show interdependence

A

if oligopoly firm raises price proportionally they lose a lot of market share as quantity decreases

If oligopoly firm decreases price proportionality in the long term they don’t gain enough market share for it to be worth while as other firms will follow.

therefore price rigidity

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5
Q

how does kinked demand curve show why firms don’t need to change their price?

A

When adding the marginal revenue curve to the kinked demand curve model we see if costs increase i.e Marginal cost curve shifts outwards within the vertical part of the Mr curve. if oligopolistic is profit maximiser (mr=mc) in any case they will end up charging at P1 due to reading off the AR curve at the same position due to the marginal revenue point being vertical assuming quantity has stayed the same.

(Draw if don’t understand)

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6
Q

Conclusions from the kinked demand curve?

A

could be price competition (even if doesn’t make sense e.g. price wars for supermarkets)

see a lot of non price competition (branding, adverting)

interdependence could frustrated and tempt firms to collude and act as a monopoly

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7
Q

what is concentration ratio

A

the collective market share of the biggest firms in the market

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8
Q

what other diagram apart from kinked demand curve show something about oligopoly

A

game theory

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9
Q

what does game theory show

A

why oligopolies rely on interdependence and why their is price rigidity.

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10
Q

explain game theory

A

two firms (A,B) are facing the same pricing decisions to either price high or price low

if the two firms both charge the high price they will gain an equal amount of profit

If firm B decides to charge a high price firm A has a decision to make as if they match the high price they will both make the same profit, however if Firm A chooses a rational outcome of charging a lower price they could make more profit at the expense of firm B making less profit.

if firm A decides to charge a lower price and firm B matches this they will both make a smaller profit then if they both decided to charge a higher price and if Firm B charges the higher price firm A will make a higher profit

the box with the two smaller equal outcomes ( if firm A and B both charge the lower price) is the Nash equilibrium this is a rational equilibrium which will last in the long term

The dominant strategy in the game is to charge the lower price as each firm can either make more profit than the other or match the same profit.

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11
Q

what are the conclusions from game theory

A

price rigidity as dominant strategy in this case is to charge the lower price therefore non price competition is needed to gain market share and edge on competitors

this temps collusion, both firms can maximise profits by agreeing to both charge high price rather settling for the nash equilibrium

but also temptation to cheat on agreement both firms may agree on a price but a firm can undercut to make more profit and cheat the collusion this is especially apparent if one firm is worse of from another

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12
Q

what are the two types of oligopolies

A

competitive and collusive

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13
Q

what are competitive oligopolies based off and what factors promote competitive oligopolies .

A

based upon price or non price competition (branding)

if their is a large number of firms compared to standard oligopoly organising collusion is a too tricky and wont be done

low barriers to entry making huge supernormal profit by colluding isn’t incentive as more firms will enter

one firm with significant cost advantages, difficult to do

homogenous goods, don’t have price making power to fix prices

saturated market if a lot of price wars and competition and if is the only way to gain advantage not going to see collusion

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14
Q

what are the two types collusive oligopoly

A

overt collusion (firms get together to fix prices and quantities)

tacit collusion e.g. price leadership by a dominant firm which smaller firms follow or agreeing to engage in price war.

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15
Q

what factors promote collusive oligopoly?

A

small no of firms easier to organise

similar costs easer to organise and fix prices and quantities

high entry barriers supernormal profit is protected and wont attract new entry so benefits of collusion could be long term

ineffective competition policy easy to get away with

if consumer loyalty to other firms or consumer inertia (laziness) cheating is not going to benefit you as not guaranteed.

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16
Q

how would you evaluate competitive oligopoly

A

evaluate like competitive look at the pros and cons of competitive outcomes e.g. static efficient but lose dynamic efficiency, lose economies of scale

17
Q

how would you evaluate collusive oligopoly

A

evaluate like monopoly (draw diagram), no static efficiency but dynamic efficiency, dis economies of scale or economies of scale (could go either way)

18
Q

possible advantages of oligopoly (generally)

A

economies of scale more dynamically efficient

easer for consumers to choose best option due to limited amount of firms (paradox of choice)

if large competition innovation and development of better products is a possible by product

19
Q

possible disadvantages of oligopoly (generally)

A

restriction of output and raising of prices (satisfice) compared to competitive markets

cartels form monopoly power e.g. high prices, lack of choice and statically inefficient

small competitive and innovative firms cant enter the market due to high barriers to entry

more producer surplus than consumer surplus. producer essentially rules