Mod 4 Oligopoly Flashcards
What is kinked demand in non-collusive oligopoly?
Where MR=MC
Price remains stable over many cost scenarios (firms can ignore price increases or match price decreases)
Show kinked demand curve graph see graph
Kinked demand assumes the following?
- Assumes rivals will follow price decreases
- but will not follow price increases
Demand curve is kinked at market price
MR curve has a gap or vertical segment
Kinked demand 2?
Results in
- price competition not favoured
- prices rigid or ‘sticky’ even when costs change
- output occurs where MR=MC
- May seek other less dangerous ways to compete like advertising
What is sales ratio? Also known as concentration ratio , most common measurement is C4 or C8.
% of total industry sales accounted of by the largest 4 or 8 firms
Interdependence results from Fewness
This is a measure the extent to which a few firms dominate the market
PROBLEMS: does not use the market shares of ALL the firms in industry, does not give a lot of detail about competetiveness. The HERFINDHAL index is more detailed than concentration ratio.
Explain interdependence?
Each firm must consider the likely reactions of its rivals
These are difficult to predict
Oligopolists like to create a climate of uncertainty even about their demand curve (not present in monopoly or perfect competition)
Explain barriers to entry?
Economies of scale Cost differences for new entrants, old participants may have more experience, own patents to things, have better credit bargaining terms Other potential barriers: - capital requirements - control of inputs/resources - govt regulation - product recognition, complexity, proliferation -
4 broad outcomes considered to deal with uncertainty ?
- price competition
- kinked demand curve (price rigidity)
- price leadership
- collusion and mergers
See kinked demand curve graph 6b
What does the curve explain?
- price stability/rigidity and why firms tend to compete via non price
P > Po then it is elastic. FLAT - other firms will not follow
P
What is gentlemans agreement?
That one firms price change will be followed by other firms.
The LEADER needs to know others will follow, allows prices to rise over time in an orderly way.
It is informal communication about changes
Can be considered informal collusion
Collusion can be one of two types?
Tacit - underhanded
Overt - flat out collusion
What are the downfalls of collusion?
High incentive to cheat
Demand and cost differences
Number of firms
Legal obstacles, it may be illegal
What is game theory?
Actions and payoff as shown in the profit payoff matrix.
As shown there is high incentive to cheat or collude.
This may push companies to compete on things other than price like advertising and product development
See graph 7b
Characteristics of oligopoly?
Fewness - only a few firms dominate
Firms are mutually interdependent - must consider rivals reactions when determining price and product developments
They may collude or act independently
High barriers to entry
Products are either differentiated of or undifferentiated
Ex: motor vehicles, banks, airlines, cigarettes
