Oligopoly Flashcards
Oligopoly
• Few firms dominate the market
• Top 5 firms: +60% MS
Key characteristics of oligopolies (3)
Price rigidity
Interdependence
Non price competition
Interdependence
Means the decisions of one firm effect other firms within the market. Such as changes in price.
What does the kinked demand curve show?
• If a Supermarket increases price, quantity will fall significantly
• If a Supermarket decrease price, quantity will increase marginally
What is a price war?
A period of fierce competition in which traders cut prices to increase market share.
What is a monopsony?
Where there is only one buyer (E.g. supermarkets with farm products)
Why is price rigidity?
A situation in which price is resistant to change
What happens when there is a change in MC in an oligopolistic market?
Prices will remain “sticky” assuming firms want to P-Max
Why does a kinked demand curve assume?
Other firms will follow if prices are cut, but won’t follow if prices rise
Examples of non-price competition (4)
• Customer service
• Quality
• Marketing/Branding
• Loyalty schemes
Disadvantages of oligopolies (5)
• Limited customer choice
• High prices and reduced output
• Consumer inertia/ confusopoly
• High BTE: prevents competition
• Not AE or PE
Advantages of oligopolies (2)
• Dynamically efficient
• EOS
What is consumer inertia/ confusopoly?
Consumers buying the same products over time, usually due to convinced or lack of market information
What is formal collusion?
A cartel arrangement in which firms agree to set an industry price and output which enables them to achieve joint profit
What is tacit collusion?
Usually in the form of price leadership, where one firm sets a price which is subsequently accepted as the market price
Objectives of collusion (3)
• Maximise joint profit
• Lower cost of marketing wars
• Reduce uncertainty
Why cartels break down (4)
• Falling demand in a recession
• Over production by some members
• Exposure by competition authorities
• Entry of non-cartel firms into the market
What can happen when the market leader hikes the price (3)
- Other firms hike price too = peace and profits
- Other firms don’t follow = price leader will rescind hike
- Few firms follow = price leader may punish in form of sharp cuts = next time firms likely to follow
Barometric price leadership
• Smaller firm with “good insight” increases the price
• Becomes the barometer and prices movements followed
*Good insight may be due to top level accountants/ financial analysts
Penalties for cartels UK
Fine of up-to 10% of worldwide turnover
Costs of collusive behaviour (3)
• Reduced consumer welfare
• X-inefficiency
• Reinforces monopoly power
Potential benefits from collusion (3)
• Social (E.g. medical research)
• Fairer price for 3rd world nations
• SNP could lead to dynamic efficiency
