Oligopolies Flashcards
What is an oligopoly?
Limited competition - a market is shared by a small number of firms in the industry; some larger firms can dominate the industry but are interdependent with smaller ones
In an oligopoly, if one firm cuts prices and increases production, what happens to the other firms?
Other firms in the industry are likely to lose market share and may react by cutting price too
What are the barriers to entry in oligopolies?
Technology (e.g. patents/innovations), strategic barriers (e.g. bottled water), scale-related barriers (e.g. aircraft manufacture)
Strategies that dominant firms employ depend on assumptions about other firms in the market - what happens if a firm thinks that another firm will competitively produce additional units of output?
Its demand curve would shrink to the left and produce less output
What can determine how decisions are made under market conditions of oligopoly?
Collusion, price leadership, non-collaborative game theory, other behavioural assumptions
How would collusion enable firms to maximise their profits?
By ensuring that supply is kept low and prices rise for everyone’s products (so that prices do not diminish if the market is flooded with supply)
What is price leadership?
When a firm takes the lead in setting the market price as the dominant firm, which follower firms follow and decide how much output they will produce based on the recommended market price
How is the dominant firm’s demand curve calculated?
It is the difference between market demand (D) and the supply of the fringe firms (Sf)
How do dominant firms have an advantage over follower firms in a price leadership oligopoly?
They usually have a lower MC for production than the follower firms
How do dominant firms facilitate the survival of follower firms?
By setting higher prices to earn economic profits, allowing the follower firms to exist even though they have higher production costs (prevents price limitation so squeeze out the follower firms)
What does a kinked graph reflect?
The assumption that if prices are raised, followers will not follow suit and they will lose customers and sales. If prices are lowered, then competitors will react by lowering their prices too.
What do kinked graphs suggest about the elasticity of demand?
Assumption that demand is elastic if prices are raised, but that it is inelastic if it is lowered
Why is a kinked curve kinked?
Because follower firms will follow a dominant firm in lowering prices but not raising them
What do kinked curves imply?
The alleged rigidity of prices in oligopolistic markets, and that there are significant variations in MC without causing prices to change
