Market Structures - Oligopoly Flashcards
When can a market be considered oligopolistic?
When the five largest firms have a combined market share above 60%
What products are available in an oligopoly?
Branded products
What are entry barriers like in an oligopoly?
High entry barriers to help maintain market dominance for leading firms
How strong is a pricing powers of a firm in an oligopoly?
They have a strong pricing power
What is the potential to earn supernormal profit in an oligopoly?
Supernormal profits are maintained by high entry barriers
Are firms in an oligopolistic market likely to be allocatively efficient?
No
Price > MC therefore firms are not allocatively efficient.
There is an increased risk of a greater welfare loss from price collusion.
Are firms in an oligopolistic market likely to be productively efficient?
There is a risk of x-inefficiency (when average costs are higher than they would be with competition in the market).
Firms in an oligopoly make interdependent strategic decisions, what does this mean?
One firms output and price decisions are influenced by the likely behaviour of their competitors.
Define the term collusion?
Collusion refers to businesses working together to agree to jointly set prices high and/or restrict output.
Give the three ways which collusion can occur?
Horizontal - between firms at the same stage of production
Vertical - between businesses at different stages of production
Explicit vs tactical collusion - open vs quiet collusion.
What are the benefits of collusion to the firm?
It enables them to maximise profits as they do not have to drop their price
It can help to save money on marketing
Collusion reduces uncertainty, higher profits increases the producer surplus and the value of shares, thus leading to higher share prices.
Give two disadvantages of collusion in an oligopolistic market?
It damages consumer welfare- consumers have to pay higher prices
The absence of competition negatively impacts efficiency - x-inefficiencies leads to higher unit costs. There is a loss of dynamic efficiency due to a lack of an incentive to innovate
Give one benefit of collusion?
If firms make more profit they could invest more in innovation, therefore increasing dynamic efficiency.
