Oligopoly Flashcards
What are the characteristics of an oligopoly ?
High degree of market concentration (top 5 firms often control at least 60% of the market)
High barriers to entry and exit
Non price competition - If firms aren’t competing on the basis of prices firms will compete on the branding, advertising, product differentiation, customer service, advertising and marketing
Collusion tendency - cartel (illegal and stopped by the CMA)
price rigidity - stable prices
Interdependent decisions
What is an oligopoly ?
An oligopoly is an imperfectly competitive industry with a high level of market concentration. Oligopoly as a market structure is best defined by the actual conduct (day to day decisions) of firms within a defined market. E.g. there are lots of coffee shops but costa and Starbucks dominate the market
What is strategic interdependence ?
Strategic interdependence means that one firm’s output and price decisions are influenced by the likely behaviour of competitors / rivals
What happens if one firm in an oligopoly drop their prices ? E.g. Tesco drops the price of their bread from £1 to 50p
The other firms in that market will also drop their prices
What happens if one firm increases their prices in an oligopoly ? E.g. Tesco increase the price of bread from £1 to 50p
The other firms in that market will keep their prices the same
The firm that increased their price will lose market share
What are the main aspects of a non-collusive competition in an oligopoly ?
All behaviour by businesses in an oligopoly is strategic and will depend on their key objectives. These aims can vary:
1) Maintaining a satisfactory profit (minimum normal profits)
2) Protecting their market share from established competitors
3) Growing their user base of customers / economies of scale
4) Reacting to the decisions of rival firms / new entrants
What can cause a price war to break out in an oligopoly ?
Collapse of an existing price-fixing cartel agreement
- Perception that some existing firms are pricing too high making high supernormal profits
- Desire to win market share off rivals (this is a zero-sum game)
- Entry of new firms / challenger brands into the market
- Managerial motives - If price cuts increase total revenue - managers willing to sacrifice market share at expense of operating profits
- Response to external factors such as falling demand in a recession
What is an example of an oligopoly market ?
Tesco
BP
Shell
Esso
Sainsbury’s
Combined own 60% of the market
What is the purpose of advertising in an oligopoly market ?
It differentiates the product
What is the kinked demand curve ?
- A business in an oligopoly faces a downward sloping demand curve but the price elasticity of demand may depend on the likely reaction of rivals to changes in one firm’s price and output
- (a) Rivals are assumed not to follow a price increase by one firm, so the acting firm will lose market share - therefore demand will be relatively elastic and a rise in price will lead to less
revenue
-(b) Rivals are assumed to be likely to match a price fall by one firm to avoid a loss in market share. If this happens demand will be more inelastic and a fall in price will also lead to a fall in total revenue
What do we mean by a ‘race to the bottom’ ?
When one firm drops their price other firms will follow dropping their prices which will lead to a loss in total revenue
What is the formula for calculating total revenue ?
Total revenue = Quantity x price
What are examples of non-price competition ?
Innovation
Quality of service including after-sales
Free upgrades to product
Exclusivity / loyalty schemes
Branding
Sales promotions
