Oligopoly

Question 1

What is an oligopoly?

Answer 1

A market dominated by a few large firms- market structure often associated with interdependence (price interdependence- significant price making powers but set price in like with other firms) and collusion

Question 2

How do you know if a market is an oligopoly?

Answer 2

Use the F-rule:

If 5 or fewer firms have a market share of 50% or more then likely market is an oligopoly and has characteristics of one

Question 3

What are real life examples of oligopolies?

Answer 3

Pharmaceuticals e.g GSK- GlaxoSmithKline, petrol retailers e.g. BP, Shell etc

Question 4

What are the characteristics of an oligopoly?

Answer 4

Number of firms/concentration ratio- few large firms dominate … highly concentrated
Type of product- heterogeneous- similar characteristics but distinct in own way e.g. Dell PC and Apple Mac 🖥
Knowledge- imperfect
Barriers to entry/exit- high
Price setting powers- high but firms interdependent on one another

Question 5

What is a price war in an oligopoly?

Answer 5

If one firm cuts prices then others will follow to prevent losing market share-> further price cuts and ⬇️ in revenue which is why oligopoly firms avoid price competition as all firms in industry lose out … encourages collusion

Question 6

Define collusion

Answer 6

Agreement between 2 or more firms to limit competition by fixing prices and … avoiding price wars

Question 7

Is collusion legal?

Answer 7

Most collusion is illegal

Question 8

How many types of collusion are there?

Answer 8

2

Question 10

What is overt collusion?

Answer 10

Firms openly fix prices, output, marketing or sharing of customers … ✖️ competition- formal agreement
- extreme form of overt collusion is cartel e.g. sugar cartel in 🇺🇸 between 1934 and 1974 (40 years)- illegal in EU and many countries

Question 11

What is a recent example of collusion which led to a fine from the competition authorities?

Answer 11

A

Question 12

What are the types of collusion?

Answer 12

1) Overt collusion

2) Tacit collusion

Question 13

What may a firm in a collusive agreement be tempted to do?

Answer 13

Break the agreement to maximise its sales and profits by lowering prices
OR by acting as a whistleblower against a rival firm and informing to competition authorities about the collusive agreement in order to gain immunity from prosecution

Question 14

What is tacit collusion?

Answer 14

Implicit cooperation with no spoken agreement-> price fixing and ✖️ competition
Collection of firms may follow ‘price leader’ firm- typically dominant firm in market