Chapter 5 Concentrated markers : Oligopoly Flashcards
Concentration ratio
Measures the extent to which a market or industry is dominated by a few leading firms.
Define oligopoly
A oligopoly is a market dominated by a few producers,each of which has a degree of control in the market . An oligopoly is an industry where there is a high level of market concentration. Oligopoly is best defined by the conduct (or behaviour) of firms within a market.
What is the criteria for an oligopoly to exist in a industry
Normally an oligopoly exists when the top five firms in the market account for more than 60% of total demand. E.g. Supermarkets
Features of an oligopolistic market
Product branding
Entry barriers - limit or predatory pricing, advertising, integration, R+D
Interdependent decision making
Non price competition
Interdependece
Refers to the idea that when making price decisions and output decisions oligopolists have to consider not only how consumers might react but also how rival firms might react as they will have an effect on their sales and revenue
Price war
Where firms competitively lower prices to increase their market share
Kinked demand curve
A theoretical approach that endeavour to analyse reasons for price stability oligopoly.
Brand loyalty
A measure indicating the degree to which consumers will purchase a firm’s product rather than a competing firm’s product
Discontinuous marginal revenue curve
Region over which a change in marginal costs will not lead to a change in the firms price and output levels
Problems with the kinked demand curve
Does not explain pride determination
Ignores non price competition
Limited price competition; the employment by oligopolists of the practise of giving discounts or interest free credits.
Under some circumstances, the strongest firm in the market may gamble by competing on price and consequently force rivals
Game theory
An analysis of how gaming ayers react to changing circumstances and plan their response
Zero sum gaming
Where a gain by one player is offset by a loss by the other player, firms are likely to choose to leave their prices unchanged
Risk averse
Where one party does not take any action that might promote retaliatory activity by another party.
Collusion
Where firms cooperate in their pricing and output policies.
What is formal collusion
This is a situation where oligopoly is defined by conduct as some form of agreement exists between key firms in the industry about price and output policies.
Restrictive agreements
Where firms collude to indulge in anti competitive policy
Joint profits
Where firms agree to maximise shared rather than their individual profits.
Cartel
A group of firms working together, or colluding.
Likely outcomes of cartel for producers
Increase sales revenue and profit
Increase in likelihood that producers will compete by non price methods in order to increase brand loyalty
Increased profits might enable firms to increased investments pleading to improved products, which could benefit the consumers in the longer term
The effects of cartels on consumers
An increase in the price of the product.
Reduction in consumer surplus
Increase in non price competition
Increased costs for firms using the product in production of other goods.
Tacit collusion and it’s features
Where firms have reached an agreement as to each other’s behaviour As a result of repeated observations overtime.
Two firms agree to play a strategy without explicitly saying so.
Price leadership
Parallel pricing
Parallel pricing
Where firms change identical prices
Price leadership
A firm that establishes the market price that all other firms in the agreement follow.
