Oligopoly Flashcards
What is the n-firm concentration ratio
a measure of the market share of the largest n firms in an industry
What is an oligopoly?
a market with a few dominant sellers, in which each firm must take account to the behavior and likely behavior of rival firms in the industry
What is non-price competition?
a strategy whereby firms compete by advertising to encourage brand loyalty, or by quality or design, rather than on price
What is a cartel?
An agreement between firms on price and/ or output with the intention of maximising their joint profits
Tacit collusion
a situation occurring when firms refrain from competing on price, but without communication or formal agreement between them
Price leadership
a dominant producer sets a price and competitors follow
How is market share calculated?
Is usually calculated as the % of sales a firm has out of total sales
Market share can also be calculated by?
% of total sales revenue
% of profits
% of employees
If the number of firms in a market falls, what does this mean?
The market becomes more concentrated
What are the characteristics of an oligopoly?
- Few large firms (the market is dominated by a few sellers gaining from economies of scale)
- High barriers to entry (new entrants can’t easily compete away SNP, smaller firms have less impact on prices and output)
- Non-price competition (firms avoid competing on price)
- Price makers
- Interdependence- they make their decisions based on actions and reactions of rival firms. They think about rival firms first
Firms engage in non-price competition by competing with:
Why do they do this?
- Innovation
- Customer service
- Branding
- Free upgrades
Firms do this to keep revenues and profits high, as firms do not want to be forced onto the inelastic part of the demand curve
What is the assumption Oligopolies go by referring to increasing in prices of one firm?
If one firm raises prices, because other firms will not, the firm will lose the customers that switch to other firms products - lowering profits; demand is price elastic when prices rise
What is the assumption Oligopolies go by referring to a fall in prices?
If one firm lowers prices, other firms follow to avoid losing customers and market share - lowering profits; demand is price inelastic when prices fall
Why is profit maximisation not seen as a sole objective for oligopoly firms?
Because of interdependence. Firms dont make decisions independently they always think about what their rivals are doing what their rivals are going to do. IT IS A DOG FIGHT FOR MARKET SHARE!!
Examples of oligopolies?
UK supermarket industry
Mobile phone industry
What does the Kinked demand curve model show?
The behaviour of a firm trying to anticipate the behaviour of its rivals to its actions
Why is there price stability in oligopoly markets?
Because MC crosses the vertical part of the MR curve, a change in costs could lead to lower or higher profits for the oligopoly without impacting the level of output, or price. The profit maximising firm will therefore leave price constant, leading to non-price competition
When would price competition occur?
When oligopolistic conditions are weak
- relatively large number of firms in the market
- Products are good substitutes for each other
- Relatively low barriers to entry
What is collusion occur?
When firms coorperate on price or output against the interests of consumers
What is strategic alliance?
A long-term cooperative arrangement between firms in a legal way often about reducing costs, such as sharing networks, bulk buying
When does collusive behaviour occur?
When oligopolistic conditions are stronger:
- Relatively few firms
- Firms have similar costs
- Barriers to entry relatively high
What is more likely to take place in an oligopolistic market?
Tacit collusion, because few firms makes it easier to predict responses of other firms to changes in price and output
Advantages of oligopoly?
- Could be dynamically efficient (high profit levels than a more competitive firm means scope to invest SNP into R&D improving allocative and productive efficiency)
- benefits from economies of scale (few suppliers mean scope for benefiting from economies of scale and achieving a lower AC)
- Competitive oligopolies raise efficiencies as prices tend to be lower as firms are competing on price (Output raised increasing allocative efficiency) 
Disadvantages of oligopoly?
- Could be x-inefficient (lack of competition reduces incentives to reduce overstaffing, excessive stock levels leading to higher prices for consumers)
- Could be dynamically inefficient (lack of competition may mean it doesn’t reinvest profits to improve quality of product)
- Collusive oligopolies raise prices and output (economically inefficient, productive and allocatively inefficient mean that QS to consumers is restricted, reducing utility at a higher price reducing consumer utility - inefficient use of scarce resources)
Oligopoly compared to monopoly?
- Better than monopoly because more consumer choice and, if competitive, lower prices
- Worse than monopoly because less opportunity to benefit from dynamic efficiencies and economies of scale
