Oligopoly

Question 1

What is an oligopoly

Answer 1

An oligopoly is an example of an imperfect competition market

Question 2

What are the characteristics of an oligopoly

Answer 2

1. Few large firms -> high concentration ratio
2. Differentiated products -> firms are price makers
3. High barriers to entry and exit
4. Interdependence

Question 3

What are some examples of High barriers of entry and exit

Answer 3

• start up costs
• sunk costs
• economies of scale
• Hugh brand loyalty

Question 4

What is interdependence

Answer 4

Interdependence is when the actions of one firms has great impact on other firms

Question 5

What does this interdependence lead to

Answer 5

• strategic behaviour
• incentive to collude
• price rigidity -> high levels of non price competition

Question 6

Draw the kinked demand curve

Answer 6

Check If right

Question 7

What does the kinked demand curve

Answer 7

• shows price rigidity
• demand curve is highly elastic above p1 and highly inelastic below p1

Question 8

What happens on the kinked demand curve if price increases

Answer 8

• The demand falls disproportionately comforted to the price
  This is due to interdependence as if a firm increases the price other firms do not follow and this leads to demand falling as firms will keep price the same to maximise market share

Question 9

What happens if price falls

Answer 9

Demand will not increase proportionally to the fall in price
- this is due to interdependence
- other firms will follow and decrease prices as well to avoid market share being stolen

Question 10

Why do firms not need to change price

Answer 10

Due to the mc curve having a vertical point
- if costs increase in this vertical point, profit maximisers would set price at the same point as p1 so there is no need to change prices

Question 11

What does the kinked demand curve show

Answer 11

• firms do not need to change prices
• firms don’t want to change prices