Oligopolies Flashcards
oligopoly d
where a few large firms have the majority of the market share
concentration ratio d
proportion of the market share held by the dominant firms
examples of industry where there is oligopoly power
car production, banking, insurance and consumer electrics
what does a concentration ratio of 5:80 mean
the five largest firms control 80 % of the market share
what is an example of an industry with high MES
car industry
what barriers to entry can oligopolists use
predatory pricing, advertising, multiplicity of brands, integration, non-price competition, branding, R&D
how can oligopolists use predatory pricing as a barrier to entry
lower its price to a level where other firms are unable to compete
predatory pricing d
setting a price that may bankrupt a competitor firm in order to try to take it over
how can oligopolists use advertising as a barrier to entry
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
how can oligopolists use multiplicity of brands as a barrier to entry
an existing firm can capture a larger share of the market by running a large number of brands
how can oligopolists use integration as a barrier to entry
enables them to reduce costs and use predatory pricing to force small competitors out of business
how can oligopolists use non-price competition as a barrier to entry
loyalty cards or buy one get one free (BOGOF)
how can oligopolists use branding as a barrier to entry
brand image is created through advertising and should make the demand curve more inelastic
how can oligopolists use R&D as a barrier to entry
firms can come up with products that give them an edge over competitors
interdependent d
where actions by one firm will have an effect on the sales and revenue of other large firms in the market
price war d
where firms competitively lower prices to increase their market share
reactive behaviour d
the action taken by firms in response to a change in behaviour of a competitor
kinked demand curve d
a theoretical approach that endeavours to analyse the reasons for price stability in oligopoly
brand loyalty d
a measure indicating the degree to which consumers will purchase a firm’s product rather than a competing firm’s product
why is kinked demand curve elastic above the set price
competitors will keep their prices the same so an increase in price will lead to a fall in total revenue
why is kinked demand curve inelastic below the set price
if one firm lowers then others will lower as well so the resulting price war means that their total revenue will fall
why is there a discontinuous marginal revenue curve for kinked demand curve
because at the set price level the marginal revenue from the first part of the curve jumps down to join the second marginal revenue
what happens if the marginal cost curve shifts up or down in kinked demand curve
oligopolist absorbs the whole cost by taking a cut in profit or their profits increase in the case of a fall in MC
why do oligopolists directly take consequences of change in MC for kinked demand curve
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
discontinuous marginal revenue curve d
region over which a change in marginal costs will not lead to a change in the firm’s price and output levels
what are the problems with the kinked demand curve theory
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
explain problem with kinked demand curve that there is no explanation of how the original price was arrived at
there is no explanation so it does not explain price determination
explain problem with kinked demand curve that it ignores non-price competition
it ignores non-price competition which is an important feature of oligopoly in the real world
explain problem with kinked curve that it doesn’t account for limited price competition
doesn’t account for the practice of giving discounts or interest free credit
explain problem with kinked curve that the model assumes a reaction from competing firms
there is no guarantee that the competing firms will always react in the same way
explain problem with kinked curve that the firms could benefit by competing on price
the firm may reckon it is the strongest in the market and that it will be able to force its rivals out
examples of non-price methods used by supermarkets
loyalty cards
in-store advertising
in-store chemists and post offices
discounted petrol
game theory d
an analysis of how games players react to changing circumstances and plan their response
zero sum game d
where a gain by one player is matched by a loss by another
collusion d
where firms cooperate in their pricing and output policies
prisoner’s dilemma d
where prisoners both choose the worst option
risk averse d
where one party does not take any action that might promote retaliatory activity by another party
Nash equilibrium d
where the optimum strategy is to maintain current behaviour
what does game theory tell us about oligopolies
they would be better off if they colluded
restrictive agreements d
where firms collude to indulge in anti-competitive policy
joint profits d
where firms agree to maximise shared rather than their individual profits
cartel d
a group of firms working together or colluding
what is formal collusion
oligopoly where there is some sort of an agreement between the key firms, restrictive agreements or restricting output
how can firms remove the uncertainty of competing in oligopoly
by formal collusion
what are the conditions needed for collusion
all firms prepared to follow rules
market only supplied by cartel
high entry barriers
the more homogenous the product the greater likelihood of success
how can you show oligopoly on a diagram
normal monopoly diagram MC = MR but label it ‘colluding oligopolists’
what are the likely outcomes for producers of collusion
increase in sales and profit
increased likelihood that producers will compete by non-price methods
increased profits enable more investment leading to improved products
effects for consumers of collusion
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
price leader d
a firm that establishes the market price that all other firms in the agreement follow
parallel pricing d
where firms charge identical prices
explain informal collusion
one of the firms acts as a price leader and signals changes in prices to the other firms in the cartel
what are the different forms of price leadership
price leader is the dominant firm
barometric price leadership
parallel pricing
tacit collusion
barometric price leadership d
a firm whose price changes are accepted as they are adroit at interpreting market conditions
tacit collusion d
where firms have reached an ‘agreement’ as to each-other’s behaviour as a result of repeated observations over time
what are the other common forms of pricing in an oligopoly
transfer pricing and cost plus pricing
what is transfer pricing
where firms alter costs and prices to benefit from different levels of tax in different countries (Amazon)
example of transfer pricing
Amazon, declaring profits in low tax countries, minimising tax bill and maximising profits
what is it actually hard for firms to do
decide the actual level of output where profit maximisation occurs
menu costs d
the time and money spent by businesses in changing their prices in line with inflation
