Oligopoly Flashcards
What characteristics do Oligopolistic Models follow
A small number of large firms
There are high barriers to entry
Products produced may be differentiated or homogenous
There is mutual interdependence
What is strategic behaviour in an Oligopoly
Plans of action that take into account rivals’ possible courses of action
What is Collusion
An agreement between firms to limit competition between them, usually by fixing price and therefore lowering quantity produced
What happens when firms collude to limit competition
They reduce uncertainties resulting from not knowing how rivals will behave - maximise profits for the industry as a whole
What is the incentive to compete
Firms face an incentive to compete with its rivals to capture a portion of its rivals profits and market structure
What are the conflicting incentives in an oligopoly
The incentive to collude and the incentive to compete
What is a cartel
A formal agreement between firms in an industry to take actions to limit competition in order to increase profits and monopoly power - involves formal collusion
What may make it difficult for a cartel to be established and maintained
The incentive to cheat - cheating can lead to an increase in market share and profit - cartel may collapse as a result
Cost Differences between firms - each firm faces different costs of production - each firm wants to maximise profits - but a price is agreed upon for all firms to sell at - the bigger the cost difference between firms - the harder an agreement is to reach
Number of firms - the more firms there are - the harder it is to reach an agreement
Possibility of price war - If a firm cheats the agreement then a price war may occur in retaliation - firms are all worse off due to lower prices and profits
Recessions - more likely to cheat during recessions as prices and profits fall
Potential entry into the industry - Cartels survival is dependent on high barriers to entry - cartel will lead to high profits which incentivise firms to join the market
Industry lacks a dominant firm - A dominant firm can facilitate an agreement - easier to form a cartel
