Microeconomics - Oligopoly Flashcards
Characteristics of an oligopoly:
High barriers to entry and exit
High concentration ratio
Interdependence of firms
Product differentiation
Oligopoly as a market structure and a behaviour
Calculation of concentration ratios and their significance
Collusive oligopoly
Collusive behaviour occurs if firms agree to work together on something.
Collusion leads to a lower consumer surplus, higher prices and greater profits for the
firms colluding. It can allow oligopolists to act as a monopolist and maximise their
joint profits.
Firms in an oligopoly have a strong incentive to collude. By making agreements, they
can maximise their own benefits and restrict their output, to cause the market price
to increase. This deters new entrants and is anti-competitive.
Non collusive oligopoly
Non-collusive behaviour occurs when the firms are competing. This establishes a competitive oligopoly. This is more likely to occur where there are several firms, one firm has a significant cost advantage, products are homogeneous and the market is saturated. Firms grow by taking market share from rivals.
What are the two types of collusion
Overt collusion - formal agreement is made between firms
Tacit collusion - no formal agreement, but collusion is implied
What is the difference between cooperation and collusion
Cooperation is allowed in the market, whilst collusion is not. Collusion is usually with poor intentions, whilst cooperation will be beneficial. Collusion generally refers to market variables, such as quantity produced, price per unit and marketing expenditure. Cooperation might refer to how a firm is organised and how production is managed.
What is a cartel
A cartel is a group of two or more firms which have agreed to control prices, limit
output, or prevent the entrance of new firms into the market. A famous example of
a cartel is OPEC, which fixed their output of oil.
Advantages of an oligopoly
Oligopolies can earn significant
supernormal profits, so they might invest
more in research and development. This
can yield positive externalities, and make
the monopoly more dynamically efficient
in the long run. There could be more
invention and innovation as a result
Moreover, firms are more likely to
innovate if they can protect their ideas.
This is more likely to happen in a market
where there are high barriers to entry.
Higher profits could be a source of
government revenue
Disadvantages of oligopoly
The basic model of oligopoly suggests
that higher prices and profits and
inefficiency may result in a misallocation
of resources compared to the outcome
in a competitive market.
If firms collude, there is a loss of
consumer welfare, since prices are raised
and output is reduced.
Collusion could reinforce the monopoly
power of existing firms and makes it
hard for new firms to enter. The absence
of competition means efficiency falls.
This increases the average cost of
production.
