LS13- Oligopoly

Question 1

What is an oligopoly?

characteristics

Answer 1

• when few firms dominate the market
• there is a high concentration ratio
• 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)
• profit max is not sole objective, it is more of a dog fight

Question 2

Oligopoly examples

Answer 2

• global soft drink industry (coke pepsi duopoly)
• UK supermarket industry
• UK energy industry
• UK airlines

Question 3

Nash equilibrium and conclusions of it

Answer 3

• 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

Question 4

A cartel

Answer 4

A formal agreement between firms in an industry to take actions to limit competition in order to increase profits. It therefore involves formal collusion.

Question 5

Factors promoting competitive oligopoly (price or non-price competition)

Answer 5

• large no of firms
• new market entry possible
• one firm with significant cost advantages
• homogenous goods (no price-making power)

Question 6

Factors promoting collusive oligopoly (overt or tacit)

Answer 6

• small no of firms
• similar costs
• high entry barriers
• ineffective competition policy

Question 7

What could stop consumers switching even if lower prices are offered?

Answer 7

• consumer loyalty
• consumer inertia