MICRO Oligopoly

Question 1

Oligopolistic Market

• Definition

Answer 1

• A market dominated by a few producers, each of which can influence the market.

Question 2

Oligopoly

• Characteristic

Answer 2

• High concentration ratio (5-firm typically more than 60%)
• Dominated by a few large firms
• Branded/differentiated products
• High barriers to entry and exit (e.g. high sunk costs) [if not contestible]
• Price maker (unlikely to use due to interdependence; kinked demand curve)
• Non-price competition (long term +SNP), due to the kinked demand curve. e.g. innovation, loyalty schemes and branding.
• Interdependent strategic decisions
• Supernormal profits are made in short and long run

Question 3

Types of Oligopolist Structures

Answer 3

- Collusive Oligopoly: Take part in a price-fixing cartel.

- Competitive Oligopoly: Act competitive, potentially due to high levels of contestability.

• Contestible Oligopoly: Low barriers to entry so P=AC

Question 4

Oligopoly Kinked Demand Curve

• Basis
• Increase in price…
• Decrease in price…
• Assumption
• Prediction (assuming)

Answer 4

• Price elasticities of demand may depend on likely reaction of rivals.
• Rivals assumed not to follow a price increase by one firm, so acting firm will lose market share. Therefore demand will be relatively inelastic (+price = -revenue)
• Rivals assumed to match a price fall by one firm in order to maintain market share. Therefore demand will be relatively elastic (-price = -revenue)
• Assume firms looking to protect and maintain market share.
• Prices will be rigid / “sticky” even when there is a change in MC (if profit maximising)