Micro 20 - Oligopoly, collusion and concentration ratios Flashcards
What are the two ways of measuring market size?
- Market size by volume
- Market size by value
What is market size by volume?
Market size by volume looks at the total number of sales of an item by all firms in that industry
What is market size by value?
Market size by value looks at the total amount spent on the item in that industry
Define market share
A firm’s market share measures the sales of product/business as a percentage of the total market sales
What is the formula used to calculate market share?
The company’s sales / Total market sales * 100
Define concentration ratios
- Concentration ratios refer to the proportion/percentage of the total market shared between the nth largest firms
- This is often expressed as a 3 firm, 4 firm or 5 firm concentration ratio
- The n-firm concentration ratio is expressed in percentage terms, therefore a 3 firm concentration ratio would add together the market shares of the 3 largest firms within that market
What are concentration ratios used for?
Concentration ratios are used to determine the market structure and competitiveness of the market
What does a 89.54% concentration ratio for Google, Yahoo and Bing mean?
Google, Yahoo and Bing occupy 89.54% of the total market share
What is the main limitation of using concentration ratios?
Concentration ratios may provide a misleading result as if we are told that the 5-firm concentration ratio is 90% this may mean that one firm has 80% of the market and the other 4 firms have the remaining 10% share
What is an oligopoly?
An oligopoly is a market structure where there are a small number of firms which are large and interdependent, each of which has some control over the market. There is a high level of market concentration
What are the characteristics of an oligopoly market structure?
- There is a high market concentration ratio, supply is concentrated in the hands of a few firms
- High barriers to entry in the long run which allow supernormal profits
- Firms are interdependent - the actions of one firm will affect the other firms directly
- Each firm will produce slightly different products allowing each firm to be a price maker
- Non-price competition is often used by oligopolists as firms operating in oligopolistic markets tend to keep prices stable causing price rigidity in the industry due to interdependence of firms
Define Price rigidity
Price rigidity is when there are only a few firms dominating an industry, the firms will tend to avoid price competition causing price rigidity in the industry
Why do firms in an oligopoly tend to avoid price competition (avoid changing their prices)?
- Increasing prices would cause consumers to buy their products from one of the other suppliers and so will experience a drop in revenue
- Decreasing prices will increase sales for the firm but other firms will match the price decrease as well so assuming that overall demand for the industry product is unlikely to raise substantially all firms will find that the rise in demand for their petrol is proportionately small compared with the proportionate fall in price so their revenues fall
What are price wars?
Price wars are when in the short term, prices are pushed down so that firms are making losses, however they stay in the market because they are at least covering their variable costs of production which makes some contribution to fixed costs. In the long run, prices must rise perhaps because supply falls as firms leave the market
When are price wars likely to occur?
When non-price competition is weak
Define Predatory pricing
- Predatory pricing is when prices are deliberately set below average costs by a dominant firm to eliminate competition.
- In the short run the firm will make a loss, however in the long run the firm will increase prices and make higher levels of profit due to a reduction in competition