Market Structures

Question 1

What is Price Rigidity?

Answer 1

Price Rigidity is the tendency in oligopolistic markets for prices not to change, even if costs of production change. This is because the price rise would result in a fall in sales, and a price fall would potentially provoke a price war with rivals.
If a firm raises its prices, it could lose its market share to its rivals, who react by making no change to their prices.
If a firm lowers its prices, then rivals follow suit, leading to little increase in sales for the firm.

Question 2

What is Price Constancy?

Answer 2

Price Constancy involves leaving the price unchanged even if the cost of production changes. This is because it can actually cost more to change the price of the good than to take the dent in profits.
EXAMPLE: Changing prices may require the company to change its advertisements.

Question 3

Characteristics of an Oligopoly?

Answer 3

1. The market is highly concentrated
   This means there is a small number of large sellers dominating the firm.
   Example: Cadbury, Mars and Nesle dominate the chocolate market in the EU.
2. Product Differentiation
   Firms supply goods/services that are close, but not perfect substitutes.
   (mobile coverage provided by one provider is similar to that provided of another provider.)
   Firms spend large amounts of money on advertising/sponsorship to entice consumers that there product is superior from those of rivals. (Irish retail banks investing large sums of money into advertising.)
   Brand loyalty can be seen as consumers tend to stick (with the same bank/mobile provider/health insurer etc.) as it can be quite slow to change to a rival.
   Loyalty cards and loyalty programmes are used to encourage brand loyalty.
3. Interdependent firms
   Firms are interdependent when they take the likely reaction of competitors into account, especially when making price decisions. (interdependence results in price rigidity.) Example: Financial institutions in Ireland charging variable rates and fixed rates that are broadly similar to one another.

Question 4

More Characteristics of an Oligpolistic Market?

Answer 4

4. Barriers to entry
   Existing firms benefiting from Economies of scale.
   High Start up costs
   Limit Pricing
   Strong Brand Loyalty
   Brand proliferation
5. Non-Price Competition
   Advertising/Sponsorships
   Loyalty cards
   Free gifts
   Quality of Service
6. Individual firms may have other aims than profit maximization
   Avoidance of interference/regulations
   Avoidance of extra taxes on their huge profits
   Discouraging new entrance (through price limiting)
   Becoming the market leader (revolut example)

7.Collusion
Anti competitive behaviour (forming a cartel)
Through price limiting, price fixing, price leadership and restricting output(OPEC).