LS13- Oligopoly Flashcards
Oligopoly definition
- a market with just a few dominant sellers where the firms are interdependent
Oligopoly characteristics
characteristics
- when few firms dominate the market
- differentiated goods -> price makers
- high barriers to entry/exit (sunk costs, start-up costs, brand loyalty)
- interdependence - firms decisions based on actions and reactions of other firms -> price rigidity
- non-price competition (branding, quality etc)
Oligopoly examples
- UK supermarket industry
- UK energy industry
- global soft drink industry (coke pepsi duopoly)
Nash equilibrium and conclusions of it
- a rational equilibrium that can last in the long run
- not the best outcome for both firms
- leads to a temptation to collude
- incentive to cheat on the collusive agreement
A cartel
A formal agreement between firms in an industry to take actions to limit competition in order to increase profits. It therefore involves formal collusion.
Factors promoting competitive oligopoly (price or non-price competition)
- large no of firms
- new market entry possible
- one firm with significant cost advantages
- homogenous goods (no price-making power)
Factors promoting collusive oligopoly (overt or tacit)
- small no of firms
- similar costs
- high entry barriers
- ineffective competition policy
What could stop consumers switching even if lower prices are offered?
- consumer loyalty
- consumer inertia
Oligopoly definition
a market dominated by a few producers, each of which has control over the market
Examples of price related strategies
- predatory pricing
- limit pricing
- collusion
Examples of non price related strategies
- loyalty schemes e.g. club lloyds
- relocation - paying for central locations e.g. London
- advertising
- close non-profitable branches
Types of collusion
- formal collusion - when firms make a formal agreement to stick to high prices
- tacit collusion - firms make informal agreement without actually speaking to rivals, may be to avoid detection by gov regulators
- price leadership - unofficially collude by following the prices set by a market leader (hard to prove whether it is unfair or just natural operation of markets)
Conflicting incentives in oligopoly market
- firms in oligopoly face incentives that conflict with each other
- incentive to collude
- incentive to compete
Why may colluding not necessarily lead to a rise in profits?
- there may consumer loyalty to rival brands so a lower price would not encourage them to switch
- consumer inertia i.e. consumers may be lazy or find it difficult to switch
