Oligopoly Flashcards
Explain the characteristics of Oligopoly
- High barriers to entry and exit:
- High concentration ratio:
- Interdependence of firms:
- Product Differentiation:
Explain Non-Price competition
○ Firms try to increase loyalty to the brand
○ This makes demand for the good more price inelastic
○ E.G. Loyalty cards, staying open later, Buy one get one free deals, etc…
* Advertising and marketing could be used to make the brand more known and influence consumer opinion:
○ This could be bad for some firms as they will incur large sunk costs
* Brands use loyalty as a form of competition:
Explain interdependence
- Interdependence:
○ One firms actions affect another firms choices
○ Firms rely on one-another to make choices
Explain Game Theory
- Game Theory:
○ Used to predict the outcome of a decision made by one firm when it has incomplete information on another firm
Explain Nash Equilibrium
- The Nash equilibrium:
The option that leads to the best outcome for both players
Explain the Dominant Strategy
- The Dominant Strategy:
○ The best option regardless of what the other person chooses
Explain the Kinked Demand Curve
- The Kinked demand curve illustrates the feature of price instability within an oligopoly
- It assumes firms have assymetric reaction to a price change by another firm
- It is an illustration of interdependence between firms
Explain Collusion
- Collusion:
○ Occurs if firms agree to work together on something
○ E.G. Price setting, or fixing amounts produced
○ Minimising the competitive pressure from the market
Explain why Oligopolists are more likely to collude
- Firms in an Oligopoly have a strong incentive to collude:
○ By making these agreements they can maximise their own benefits and restrict their output to cause the market price to increase
○ Deters new entrants and is anti-competitive
Collusion is more likely to occur when
- Collusion is more likely to occur when:
○ There are few firms in the market
○ They face similar costs
○ High barriers to entry
○ Not easy to be caught
○ Ineffective competition policy
○ Should be some consumer inertia
Explain non-collusion
○ Occurs when firms are competing:
§ This establishes a competitive Oligopoly
When is non-collusion likely to occur
® There are several firms
® One has a cost advantage
® Products are homogenous
® Market is saturated
§ Firms grow by taking market share from others
Explain overt-collusion
○ A formal agreement is made between firms
When does overt-collusion work
§ There are only a few dominant firms, so one does not refuse
Examples of overt-collusion
§ Price fixing:
□ Maximises joint profits
□ Cuts the cost of the competition
– Through reducing sunk costs such as advertising
□ Reduces uncertainty
Explain tacit collusion
○ When there is no formal agreement but collusion is implied
○ Competition in a price war
Evaluate and Calculate Concentration Ratios
- Concentration ratio:
○ The combined share of the top firms in the market- 4 firm market share:
○ Add the market share of the top 4 firms
○ 3 firm market share same with 3
○ 2 firm market share same with 2
○ Etc…
- 4 firm market share:
Evaluate the Advantages of an Oligopoly
Oligopolies can earn significant supernormal profit and might partake in research and development
Higher profits could be a source of government revenue
Industry standards could improve
Due to firms collaborating on technology and improving it
Firms can grow large enough to benefit from economies of scale
Evaluate Disadvantages of an Oligopoly
