Concentrated markets: the theory of oligopoly Flashcards
What is an oligopoly?
Where a few large firms have the majority of the market share
What is a concentration ratio?
The proportion of the market held by the dominant firms
What does a concentration ratio of 5:80 mean?
The 5 largest firms possess 80% of the market share
What are the barriers to entry? (7) (PAMINBR)
Predatory pricing Advertising Multiplicity of brands Integration Non-price competition Branding Research and development
How does predatory pricing act as a barrier to entry?
Large firms can lower there prices where other small firms are unable to compete
What is predatory pricing?
Setting a price that may bankrupt a competitor firm in order to try and take it over
How does advertising act as a barrier to entry?
Large firms can spread the fixed costs of advertising over a large volumes of units, which decreases the unit costs
Small firms have to match the level of advertising, but with a smaller volume of output, their unit cost will be higher
How does multiplicity of brands act as a barrier to entry?
By aiming at every area in the market, the firm is likely to gain customers who change brands frequently
How does integration act as a barrier to entry?
Large firms are able to control the supply of resources, can lead to predatory pricing
What is integration?
Combining with other firms
How does non-price competition act as a barrier to entry?
Loyalty cards, persuades consumers to continue shopping with the same firm
How does branding act as a barrier to entry?
Firms stress that their brands have unique characteristics, a brand image is created through advertising, making the demand more inelastic
How does research and development act as a barrier to entry?
Can improve the quality of their products
What does interdependent mean?
Where actions by one firm will have an effect on the sales and revenue of other large firms in the market
What is a price war?
Where firms competitively lower prices to increase their market share
What is reactive behaviour?
The action taken by firms in response to a change in behaviour of a competitor
What is brand loyalty?
A measure indicating the degree to which consumers will purchase a firm’s product rather than a competing firm’s product
In the kinked demand curve, above the price, why is the demand curve elastic?
If a firm raises its price, competitors will not change theirs, and the firm will experience a fall in total revenue
In the kinked demand curve, below the price, why is demand curve inelastic?
If a firm lowers its price, competitors will follow, and the firm will experience a fall in total revenue
In the kinked demand curve, if the MC curve fluctuates withing the discontinuity, what happens?
There is no change in the level of output or price
In the discontinuity section of the kinked demand curve, if the MC curve shifts upwards, what happens?
The oligopolist would absorb all of the cost increase by taking a cut in profit
In the discontinuity section of the kinked demand curve, if the MC curve shifts downwards, what happens?
The oligopolist profit levels would increase
What are the problems with the kinked demand curve theory? (2)
There is no explanation of how the original price was determined
Ignores non-price competition
What is non-price competition likely to increase?
Increases costs (e.g-advertising) However avoids price wars
