Lesson 9 - Theory Of The Firm: Oligopoly Flashcards
What are the 3 types of pricing strategies?
Price skimming, predatory pricing, limit pricing
What is price skimming?
Charging a high price for a new product, since people are willing to pay more for the ‘latest thing’
What is limit pricing?
Setting prices just above average costs to deter new firms from entering the market (they see that no profit is being made and are put off
What is predatory pricing?
Setting prices lower in the short run to remove new firms that have entered the market
Characteristics of an oligopoly:
- a few large dominating firms
- high barriers
- high concentration ratio
- interdependent (worried about how other firms will react to their decisions)
What is a concentration ratio?
The market share of the top … firms
What are the different types of non-price competition in oligopoly markets? (Explain)
Product - differentiating their products to achieve brand loyalty
Place - where they are sold
Promotion - how profits are being spent on advertisement and promotion
What is game theory?
- Looking at the possible responses to changes in a competitive environment
- create a matrix of choices
What does the kinked demand curve show?
- interdependence of oligopolies mean that they avoid engaging in price competition
What is collusion?
Firms cooperate to gain a competitive advantage and carve the market
what is price fixing?
Firms in a competitive market agree to maintain a fixed price
What is covert collusion? (Give an example)
- using less formal ways of coordinating pricing decisions
- example = price leadership (one firm changes prices, and the other firms follow)
