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Economics Unit 3 > Oligopolies > Flashcards

Oligopolies Flashcards

1
Q

oligopoly d

A

where a few large firms have the majority of the market share

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2
Q

concentration ratio d

A

proportion of the market share held by the dominant firms

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3
Q

examples of industry where there is oligopoly power

A

car production, banking, insurance and consumer electrics

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4
Q

what does a concentration ratio of 5:80 mean

A

the five largest firms control 80 % of the market share

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5
Q

what is an example of an industry with high MES

A

car industry

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6
Q

what barriers to entry can oligopolists use

A

predatory pricing, advertising, multiplicity of brands, integration, non-price competition, branding, R&D

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7
Q

how can oligopolists use predatory pricing as a barrier to entry

A

lower its price to a level where other firms are unable to compete

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8
Q

predatory pricing d

A

setting a price that may bankrupt a competitor firm in order to try to take it over

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9
Q

how can oligopolists use advertising as a barrier to entry

A

large firms spread cost of advertising over thousands of units which reduces unit cost, new entrants have to match level of advertising but without the volume of output

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10
Q

how can oligopolists use multiplicity of brands as a barrier to entry

A

an existing firm can capture a larger share of the market by running a large number of brands

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11
Q

how can oligopolists use integration as a barrier to entry

A

enables them to reduce costs and use predatory pricing to force small competitors out of business

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12
Q

how can oligopolists use non-price competition as a barrier to entry

A

loyalty cards or buy one get one free (BOGOF)

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13
Q

how can oligopolists use branding as a barrier to entry

A

brand image is created through advertising and should make the demand curve more inelastic

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14
Q

how can oligopolists use R&D as a barrier to entry

A

firms can come up with products that give them an edge over competitors

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15
Q

interdependent d

A

where actions by one firm will have an effect on the sales and revenue of other large firms in the market

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16
Q

price war d

A

where firms competitively lower prices to increase their market share

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17
Q

reactive behaviour d

A

the action taken by firms in response to a change in behaviour of a competitor

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18
Q

kinked demand curve d

A

a theoretical approach that endeavours to analyse the reasons for price stability in oligopoly

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19
Q

brand loyalty d

A

a measure indicating the degree to which consumers will purchase a firm’s product rather than a competing firm’s product

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20
Q

why is kinked demand curve elastic above the set price

A

competitors will keep their prices the same so an increase in price will lead to a fall in total revenue

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21
Q

why is kinked demand curve inelastic below the set price

A

if one firm lowers then others will lower as well so the resulting price war means that their total revenue will fall

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22
Q

why is there a discontinuous marginal revenue curve for kinked demand curve

A

because at the set price level the marginal revenue from the first part of the curve jumps down to join the second marginal revenue

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23
Q

what happens if the marginal cost curve shifts up or down in kinked demand curve

A

oligopolist absorbs the whole cost by taking a cut in profit or their profits increase in the case of a fall in MC

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24
Q

why do oligopolists directly take consequences of change in MC for kinked demand curve

A

if it is in gap where there is the discontinuous marginal revenue curve then output will stay the same and so will price so they take the hit

25
Q

discontinuous marginal revenue curve d

A

region over which a change in marginal costs will not lead to a change in the firm’s price and output levels

26
Q

what are the problems with the kinked demand curve theory

A

no explanation of how original price arrived at,
ignores non-price competition,
doesn’t account for limited price competition,
assumes a reaction by competing firms,
the firm decides it could benefit by competing on price

27
Q

explain problem with kinked demand curve that there is no explanation of how the original price was arrived at

A

there is no explanation so it does not explain price determination

28
Q

explain problem with kinked demand curve that it ignores non-price competition

A

it ignores non-price competition which is an important feature of oligopoly in the real world

29
Q

explain problem with kinked curve that it doesn’t account for limited price competition

A

doesn’t account for the practice of giving discounts or interest free credit

30
Q

explain problem with kinked curve that the model assumes a reaction from competing firms

A

there is no guarantee that the competing firms will always react in the same way

31
Q

explain problem with kinked curve that the firms could benefit by competing on price

A

the firm may reckon it is the strongest in the market and that it will be able to force its rivals out

32
Q

examples of non-price methods used by supermarkets

A

loyalty cards
in-store advertising
in-store chemists and post offices
discounted petrol

33
Q

game theory d

A

an analysis of how games players react to changing circumstances and plan their response

34
Q

zero sum game d

A

where a gain by one player is matched by a loss by another

35
Q

collusion d

A

where firms cooperate in their pricing and output policies

36
Q

prisoner’s dilemma d

A

where prisoners both choose the worst option

37
Q

risk averse d

A

where one party does not take any action that might promote retaliatory activity by another party

38
Q

Nash equilibrium d

A

where the optimum strategy is to maintain current behaviour

39
Q

what does game theory tell us about oligopolies

A

they would be better off if they colluded

40
Q

restrictive agreements d

A

where firms collude to indulge in anti-competitive policy

41
Q

joint profits d

A

where firms agree to maximise shared rather than their individual profits

42
Q

cartel d

A

a group of firms working together or colluding

43
Q

what is formal collusion

A

oligopoly where there is some sort of an agreement between the key firms, restrictive agreements or restricting output

44
Q

how can firms remove the uncertainty of competing in oligopoly

A

by formal collusion

45
Q

what are the conditions needed for collusion

A

all firms prepared to follow rules
market only supplied by cartel
high entry barriers
the more homogenous the product the greater likelihood of success

46
Q

how can you show oligopoly on a diagram

A

normal monopoly diagram MC = MR but label it ‘colluding oligopolists’

47
Q

what are the likely outcomes for producers of collusion

A

increase in sales and profit
increased likelihood that producers will compete by non-price methods
increased profits enable more investment leading to improved products

48
Q

effects for consumers of collusion

A

increase in price of product
increased costs for firms using product for production of other goods
reduction of consumer surplus
increase in non-price competition

49
Q

price leader d

A

a firm that establishes the market price that all other firms in the agreement follow

50
Q

parallel pricing d

A

where firms charge identical prices

51
Q

explain informal collusion

A

one of the firms acts as a price leader and signals changes in prices to the other firms in the cartel

52
Q

what are the different forms of price leadership

A

price leader is the dominant firm
barometric price leadership
parallel pricing
tacit collusion

53
Q

barometric price leadership d

A

a firm whose price changes are accepted as they are adroit at interpreting market conditions

54
Q

tacit collusion d

A

where firms have reached an ‘agreement’ as to each-other’s behaviour as a result of repeated observations over time

55
Q

what are the other common forms of pricing in an oligopoly

A

transfer pricing and cost plus pricing

56
Q

what is transfer pricing

A

where firms alter costs and prices to benefit from different levels of tax in different countries (Amazon)

57
Q

example of transfer pricing

A

Amazon, declaring profits in low tax countries, minimising tax bill and maximising profits

58
Q

what is it actually hard for firms to do

A

decide the actual level of output where profit maximisation occurs

59
Q

menu costs d

A

the time and money spent by businesses in changing their prices in line with inflation

Economics Unit 3 (10 decks)

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