Oligopoly Flashcards
What is an oligopoly
A market structure dominated by a small number of very large firms
What are the key characteristics of an oligopoly
Interdependent strategic decision making by firms within the industry
Periods of price rigidity (sticky prices)- not much price change
Intense non price competition especially branding, customer service ect
Occasions when firms might decide to collude and fix market prices
Periodic, often short but intense price wars
High barriers of entry and exit
Dominated by a few large firms
High market concentration ratio
What can cause price wars 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
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
Why can’t a firm increase price in an oligopoly
This would lead to none of the other firms increasing their price, meaning they would lose market share and demand
Why is there price rigidity in an oligopoly
A slight increase in price (to P2) results in a massive loss of market share as the competitors will not increase their price
A major drop in price only results in a modest (minimal gain) market share
So altering the price from P1 will not make sense causing price rigidity
