Oligopoly Flashcards
Define oligopoly
A market dominated by a few large firms
What are the features of oligopolies?
Few firms Large firms dominate Different Products Barriers to entry Collusion Non-price competition Price competition
Describe a few firms (2)
- Few firms in the market - no defined number
- Common market structure around the world
Describe how large firms dominate in an oligopoly (4)
- Oligopoly exists - few large firms dominate the market
- Own large proportion of the market/high concentration ratio
- Large firms are highly influential e.g. set prices that the majority of consumers will pay
- Smaller firms typically copy prices charged by dominant firms
Expand on how opologistic markets produce different products (3)
- In most oligopolistic markets, the products sold by large firms will be close substitutes for each other yet likely to be some differences.
- Each manufacturer produces a wide product range, each product is different & aimed at a slightly different market segment
- Firms in an oligopolistic market usually make a deliberate effort to differentiate their products from those of rivals.
- non-price competition = advertising to build brand loyalty and product quality
Barriers to entry in oligopolies
- Firms that dominate the market benefit from barriers to entry
- E.g. set/start-up costs may be high, economies of scale? brand loyalty
- Dominant firms discourage entry by investing heavily in their brands - developing brand loyalty.
- Without BTE high profits would attract new firms - as a result their dominance/market share would be reduced.
Describe collusion
Collusion takes place: informal agreement between (dominant) firms to restrict competition
- Eg. agree to share market geographically = each firm supplies particular region and not compete in others
- Price fixing = all firms agree to charge same higher price
- Firms restrict output = supply decreases and price rises
- Collusion is often illegal as it exploits consumers
Develop how firms engage in non-price competition
- Firms want to avoid price wars therefore they compete using advertising and promotions e.g. coupons, loyalty cards, competitions and free offers
- Branding is also common via giving products name, term, sign/symbol (helps consumer to identify them)
- Firms create brand loyalty through advertising so consumers repeatedly purchase
- Product differentiation also common as firms try to convince consumers their brand is different from their competition (real/imaginary) reinforced by marketing teams / quality of product and service
Price competition
- Typically prices stay the same (stable) for long periods, market leader sets price and others follow
because firms are afraid of a price war; one firm cuts price, others in market must cut or they’ll lose sales.
As a result, revenue and profits would be lower for all firms. - However, price wars do occur but tend to last for short periods of time.
- Firms in oligopoly are said to have interdependence. Actions of one firm have direct impact on the other firms in the industry base decisions off of actions/reactions of other price
- They will have to make changes of their own - perhaps match the price cut or invest in some form of
promotion. They will need to do this or risk losing market share to rivals.
Choice + (4)
- Competition in oligopolistic markets ensures that consumers are provided with some choice.
One of the ways in which oligopolists compete is by launching new brands. These new brands provide consumers with new products, and
often, an ever-growing choice in the market.
Small producers also provide
choice by supplying a niche market
However it is not always the case where consumer are provided with choice - little difference in quality
Economies of scale +
If the dominant firms are able to exploit economies of scale, their average
costs will be lower. Therefore, it is possible that some of the cost savings will
be passed on to consumers in the form of lower prices. The smaller rivals in
the market cannot exploit economies of scale. They often survive because they
do not compete directly with the dominant firms.
A03 / A04
if there was competition between dominant firms in an oligopolistic market…
Consumers may benefit… innovation, product development, increasing choice, open pricing and lower costs and potentially price wars where prices are cut dramatically
However, if there is collusion, too much spending on advertising and a lack of innovation consumers will be worse off. Or if there is a fierce price war that eliminate one or more firms - this will result in less competition between smaller group of dominant firms.
Innovation in oligopolistic markets
- level of innovation varies
- large/powerful firms have the resources to invest in R&D
- individual firms can create superior new models of products
- argued that immense spending on advertising/promotion is better spent on innovation
How are price wars advantageous?
- price are fairly stable for long periods of time
- this is helpful as it provides consumers with certainty
- consumers benefit from price wars as one firms cuts price aggressively others in the market forced to follow or risk losing market share.
- As a result consumers benefit lower prices in market.
AO4
- Price wars don’t last long
- threat of firm squeezed out
- market less competitive - more power to raise prices higher
Advantages of oligopolies
Choice Quality Economies of scale Innovation Price wars
Disadvantage of oligopolies: cartel
- Consumer not likely to benefit from no competition in oligopoly, disadvantage is the temptation for firms to collude - restrict competition by price fixing pay higher prices
Consumers also suffer is market shared out geographically due to lack of choice as only one firm supplies each area
cartel: where a group of firms or countries formally join together and agree on pricing/output levels in the market
- cartels are successful able to act as a monopoly (illegal)
- restrict supply to force prices up
AO4 agreement not always reached, restriction of supply not guaranteed/always achieved
Quality +
- since non-price competition common in oligopolies
- firms differentiate products to make it better therefore quality of products become superior
- however this superior quality may not be real only be perception due to strong advertising and promotion
