9.7 Signposting

Question 1

Oligopoly Performance Potential Outcomes

Answer 1

1. Firms can compete on price despite the rationale of the kinked demand model.
2. Firms can compete on non-price factors by strengthening advertising, developing brand loyalty,
   improving product and service quality
3. Firms can break interdependence by colluding and forming a cartel.
4. Firms can break interdependence by engaging in tacit collusion or ‘price leadership’.

Question 2

Oligopoly Performance Cons

Answer 2

1. Cartels produce outcomes that are allocatively inefficient
2. Cartels are productively inefficient
3. Cartels can be X inefficient
4. Cartels can be productively inefficient if they become too large and suffer from diseconomies of scale

Question 3

Oligopoly Performance Pros

Answer 3

1. Cartels can be dynamically efficient as supernormal profit is being made in the long run.
2. Even though cartels are productively inefficient, they may still be exploiting greater economies of
   scale than smaller competitive firms who produce lower levels of output given the ferocity of the
   competition
3. If oligopolists behave competitively, outcomes could be like those attained in competitive market
   structures. Allocative efficiency can be achieved with prices close to or equal to marginal cost. Resources are allocated according to consumer demand with consumers getting what they demand at
   the quantity they desire
4. Competitive oligopolists can also be productively efficient where production takes place at the lowest
   point of the average cost curve. This means all possible economies of scale are being exploited as firms
   cannot increase output and lower their average costs any further.