Oligopolies

Question 1

Concentration Ratios show How dominant the big firms in a market are

Answer 1

1. Some are dominated just by a few = concentrated markets
2. Level of domination is measured by the concentration ratio
   - ‘look in book’

Question 2

There are two ways to define an Oligopoly

Answer 2

1. Can define it in terms of market structure

2. Or can define it in terms of conduct of firms (i.e. how they behave)

Question 3

Firms in an oligopoly can either Compete or Collude

Answer 3

1. Unlike monopolies and perfect competition, there’s no single strategy that firms in an oligopolistic firm should adopt in order to maximise profits
2. Firms in oligopoly face a choice - what kind of long-term strategy - each decision affected by how other interdependent firms in market act.

Question 4

There are different possible scenarios in an oligopolistic market

Answer 4

1. Competitive Behaviour
   - various firms dont cooperate but compete esp on price
2. Collusive behaviour
   - Various firms cooperate with each other esp over prices charged
   - Formal collusion (make an agreement) => involves cartel = illegal
   - Informal collusion => tacit = without agreement
   Some in collusive oligopoly act as price leaders, setting the pattern for others to follow

Question 5

The behaviour that occurs depends on the characteristcs of a particular market

Answer 5

Competitive behaviour is more likely when…..
a, b, c, d (in book)
Collusive behaviour is more likely when….
a, b, c, d

Question 6

Collusion can bring about similar outcomes to a Monopoly

Answer 6

1. Collusive oligopolies can produce results quite similar to those in a monopoly
2. Generally => higher prices, restricted output as well as allocative and productive efficiency. etc…
3. As firms in a collusive oligopoly dont lower prices even though they could, they make supernormal profits at the expense of consumers
4. LOOK AT GRAPH ON PAGE 69
5. Firms that collude on price may still compete in other ways though e.g. marketing policies are v important.
6. Other firms try to break into the market may face predatory pricing tactics…

Question 7

Oligopolies Might Not be as bad as they sound

Answer 7

1. Some economists argue that collusive oligopolies are either
   a) not as bad
   b) unstable
   c) both of the above
2. They argue that formal collusion is quite unlikely - illegal and any informal collusion is likely to be temporary - one firm will cheat, and lower its prices to gain advantage, first-mover advantage => price war
3. Even in a collusive oligopoly:
   - if firms aren’t competing price, then non-price competition might even be stronger, leading to some dynamic efficiency. This would be good for consumers if it => product innovations and improvements
   - firms are unlikely to raise prices to very high levels - high prices may provide a strong incentive for new entrants to join the market, even if barriers to entry are high.
4. Competitive oligopolies can achieve high levels of efficiency - these markets often work well in practice.