Oligopolies Flashcards
What are the characteristics of an oligopoly?
-High barriers to entry and exit
-High concentration ratio
-Interdependence of firms
-Product differentiation.
When does an oligopoly exist?
An oligopoly exists where there are only a few firms in the market. Smaller firms are likely to operate but will not have a significant impact on market share.
Oligopolies tend to compete on non-price competition (e.g. promotion, advertisement, brand loyalty) and there may be an element of collusion. Like monopolies and duopolies, oligopolists can exploit by charging prices.
High barriers to entry and exit in oligopolistic markets, particularly through advertising and R&D. This means ease of entry to the market is far more difficult for smaller.
They are interdependent, if one firms cuts a price, then others are likely to follow, resulting in lower income for the market as whole.
What is meant by the interdependence of firms?
The action of one firms will impact on the other firms in the industry. Interdependence creates uncertainty as firms are unsure of how competitors will react to their policies and whether they will be proactive in the market.
Why is an oligopoly a very dynamically efficient market?
They tend to spend heavily on new product development.
What is mean by the concentration ratio?
How much of the market share is concentrated at the top of the market (how much of the market share is concentrated by the market share).
In an oligopoly, the few select firms have a concentration ration greater than 50% i.e. the market share is concentrated in the hands of a few firms.
A rule of thumb is that an oligopoly exists when top five firms account for more than 60%.
What is product differentiation?
When a firm makes their product different to the competition by adapting the actual product in some way or adapting the existing product through advertising and branding. The business might have a product range selling a variety of goods or services to meet consumer needs. This is relevant for oligopolies as it is important for firms to differentiate themselves from the competition in order to sell.
What are the benefits of collusion?
Firms in oligopolistic market will benefit from colluding with one another. This will allows them to operate closer to condition of monopoly. Therefore, they can charge higher prices and gain higher sales
What is a cartel?
A cartel is a formal agreement between firms to collude in operation of the market. This will normally take the form of price fixing. It may normally take the form of price fixing.
What is game theory?
Game theory is the study of strategies undertaken by firms that operate in interdependent markets.
What are price wars?
When a firm lowest a price in order to increase market share. Other firms will react to losing market share by lowering price to. This will continue as firms to seek regain lost markets share.
Consumer benefits from lower price but overall revenues of oligopolists will fall.
What is predatory pricing?
When a larger firm with multiple revenues streams set a price lower than costs to try and force other smaller/independent firms out of the market so that the larger firms gains market share.
What is limit-pricing?
Limit-pricing occurs when a firms operates below the profit maximising output of MC=MR. The firms will still make a profit but potential entrants will be deterred from entering the market as the lower price may not be profitable.
What does product differentiation reduce?
Reduces the likelihood as price wars as firms compete through non-price factors.
Brand loyalty leads to…
repeat purchases.
Why is there high barriers to in an oligopoly?
There are high level of capital investment in an oligopoly.
This makes it more challenging for firms to enter the market and buy similar levels of assets.
There is high investment in R&D which leads to innovation of products/processes.
