oligopolies Flashcards
what is an oligopoly
when a few firms dominate the market and the top 5 firms have over 60% of the market sales
what does it mean for the market to be highly concentrated
when it is shared between a few firms
characteristics of an oligopoly
market dominated by a few large firms
high market concentration ratio
branded product
mid barriers to entry and exit
possess some price setting powers
sell similar but differentiated goods
imperfect knowledge
what is concentration ratio
this measures the combined market share of the top few firms in a market
what is interdependence
Interdependence is when people or things rely on each other for support or function.
potential strategies for interdependence
change price
keep price the same
collude
compete
why would it be good to be the first mover
so u can get more market share
why would it be good to be the second mover
could be an advantage to see how somebody else’s new strategy works
what are sticky prices
economic theory suggests that under oligopoly, once a price has been determined it will stick at this price
because firms cannot pursue independent strategies
what is the kinked demand curve
The kinked demand curve is a model used to explain price rigidity in an oligopoly.
problemd with the kinked demand curve
•sellers may keep price stable but reduce quality or quantity of the product
•may not hold true in the long run
•based on the assumption that other firms will follow a price cut not follow price rise
market conduct for oligopolies
firms can collude
sticky prices
interdependence
collusion
price leadership
what is collusion
where a group of businesses agree to act higher on price/market sharing and output
why might firms collude
reduce uncertainty
may reduce the cost of innovation
may reduce business costs
types of colluding
tacit collusion- unspoken price matches
explicit collusion- formal agreements to fix prices (illegal) can benefit consumers as well
