oligopoly

Question 1

4 characteristics of an oligopoly

Answer 1

high barriers to entry

high concentration ratio

interdependance of firms

product differentiation

Question 2

what is concentration ratio

Answer 2

• The concentration ratio of a market is the combined market share of the top few firms in a market
• The higher the concentration ratio, the less competitive the market, since fewer firms are supplying the bulk of the market.

Question 3

what is collusive behaviour

Answer 3

• Collusive behaviour occurs if firms agree to work together on something. Such as choosing to set a price, which minimises the competitive pressure they face

Question 4

what collusion lead to

Answer 4

• Collusion leads to lower consumer surplus, higher prices and greater profits for the firms colluding. It can allow oligopolists to act as a monopolist and maximises their joint profits

Question 5

why do firms in oligopoly collude

Answer 5

• Firms in an oligopoly have a strong incentive to collude. By making agreements, they maximise their benefits and restrict their output, causes the market price to increase. Means new firms won’t join

Question 6

what is non collusive

Answer 6

• Non-Collusive barriers occurs when the firms are competing. This establishes a competitive Oligopoly. Occurs when there are several firms, one firm has a significant cost advantage, products are homogenous, and the market is saturated. Firms grow by taking market share from rivals

Question 7

what is overt collusion

Answer 7

• Overt collusion is when a formal agreement is made between firms. It works best when there are only a few dominant firms, so that one does not refuse. It is illegal in the EU and US

Question 8

example of overt collusion

Answer 8

For example, it is often assumed that fuel companies partake in overt collusion. May be in the form of price fixing, which maximises their joint profits, cuts the cost of competition, such as preventing firms using wasteful advertising, and reduces uncertainty.

Question 9

what is tacit collusion

Answer 9

Tacit Collusion occurs when there is no formal agreement, but collusion is implied. For example, in the UK supermarket industry, firms are in a price war. Price wars are harmful to the supermarkets and their suppliers.

Question 10

advantages of oligopolies (4)

Answer 10

Oligopolies can earn significant supernormal profits – More investment – Greater R&D – Positive externalities – More dynamically efficient in the long run – Could result in more invention and innovation

Higher profits can be a source of Government Revenue

Industry standards could improve – E.G. pharmaceutical industry – Firms collaborate on technology and improve it – Therefore saves on duplicated R&D

Oligopolies are large – Can exploit Economies of Scale – Lower average cost of production – Shown on long run average cost curve

Question 11

disadvantages of oligopolies (3)

Answer 11

The basic model of Oligopoly suggests Higher prices, Profits and Inefficiency – Lead to misallocation of resources – Compared to the outcome in a competitive market

If firms collude - There is a loss of consumer welfare - Since prices are raised and output is reduced

Collusion could reinforce the monopoly power of existing firms – Making it harder for new firms to enter – absence of competition means efficiency falls – this then increases the average cost of production