B2.01.14: Intro to Oligopoly Flashcards

1
Q

Define oligopoly

A

A few firms dominating the market

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2
Q

Define Market share

A

A percentage of the total shares or revenues in a specific market that’s controlled by a company or product

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3
Q

8 Assumptions of Oligopolies?

A
  • Few dominant firms: High conc. rate
  • Interdependence: price rigidity (actions of one firm directly impact the others)
  • Significant Barriers to Entry: Substantial start-up costs, EOS and established brand loyalty
  • Product differentiation: To distinguish offerings from competitors
  • Non-price competition: Adverts, Innovation and customer service
  • Collusion (Firms coordinating their actions to manipulate the market)
  • Price Rigidity (Prices resistant to change even in response to fluctuations in demand due to fear of price wars)
  • Profit maximisation not sole objective
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4
Q

Define concentration ratios and how to use them to determine the number of firms dominating the market

A
  • A measure of market share of a certain number of firms
  • an increase in the ratio indicates fewer firms dominating the market
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5
Q

Formula for concentration ratios?

A

Biggest to smallest
- Market Share Firm 1 + Market Share Firm 2…
- Final answer has to be in percentage

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6
Q

What does the oligopoly diagram to show efficiencies look like?

A
  • Perfect competition diagram
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7
Q

What does the kinked demand curve show

A
  • Clearly demonstrates interdependence by showing price rigidity (firms don’t want to nor do they need to change prices)
  • Shows inelastic and elastic demand
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8
Q

How does the kinked demand curve show that firms don’t want to change the price by increasing it?

A
  • When p1 increases to p2, the q.d. decrease is proportionally greater than the increase, q1 to q2.
  • This is due to interdependence; other firms are not going to follow this price rise as they are looking to gain market share and undercut this firm
  • This will result in TR and marker power to decrease for this firm
  • Therefore, raising prices makes no rational sense due to interdependence and how other firms will react
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9
Q

How does the kinked demand curve show that firms don’t want to change the price by decreasing it?

A
  • When price decreases from p1 to p3, the q.d decrease is proportionally less, q1 to q3
  • This is due to other firms and how they are going to react. Other firms follow looking to protect their market share and get into a price war
  • This will result in total revenue to decrease (as the demand is inelastic) and over time, there’s going to be no change in the market share
  • Therefore, this shows that firms won’t gain any market share in the long run if prices get reduced
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10
Q

How does the kinked demand curve show that firms don’t need to change the price

A
  • Due to the vertical gap between AR and MR, a profit-maximising oligopoly will be charging a price at p1
  • This is because MC=MR (profit maximisation point) gives us a quantity of q1 and as long as the quantity is q1, this will always give a price of p1.
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