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
