Oligopoly Flashcards

1
Q

Oligopoly

A

• Few firms dominate the market
• Top 5 firms: +60% MS

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2
Q

Key characteristics of oligopolies (3)

A

Price rigidity
Interdependence
Non price competition

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3
Q

Interdependence

A

Means the decisions of one firm effect other firms within the market. Such as changes in price.

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4
Q

What does the kinked demand curve show?

A

• If a Supermarket increases price, quantity will fall significantly
• If a Supermarket decrease price, quantity will increase marginally

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5
Q

What is a price war?

A

A period of fierce competition in which traders cut prices to increase market share.

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6
Q

What is a monopsony?

A

Where there is only one buyer (E.g. supermarkets with farm products)

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7
Q

Why is price rigidity?

A

A situation in which price is resistant to change

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8
Q

What happens when there is a change in MC in an oligopolistic market?

A

Prices will remain “sticky” assuming firms want to P-Max

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9
Q

Why does a kinked demand curve assume?

A

Other firms will follow if prices are cut, but won’t follow if prices rise

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10
Q

Examples of non-price competition (4)

A

• Customer service
• Quality
• Marketing/Branding
• Loyalty schemes

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11
Q

Disadvantages of oligopolies (5)

A

• Limited customer choice
• High prices and reduced output
• Consumer inertia/ confusopoly
• High BTE: prevents competition
• Not AE or PE

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12
Q

Advantages of oligopolies (2)

A

• Dynamically efficient
• EOS

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13
Q

What is consumer inertia/ confusopoly?

A

Consumers buying the same products over time, usually due to convinced or lack of market information

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14
Q

What is formal collusion?

A

A cartel arrangement in which firms agree to set an industry price and output which enables them to achieve joint profit

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15
Q

What is tacit collusion?

A

Usually in the form of price leadership, where one firm sets a price which is subsequently accepted as the market price

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16
Q

Objectives of collusion (3)

A

• Maximise joint profit
• Lower cost of marketing wars
• Reduce uncertainty

17
Q

Why cartels break down (4)

A

• Falling demand in a recession
• Over production by some members
• Exposure by competition authorities
• Entry of non-cartel firms into the market

18
Q

What can happen when the market leader hikes the price (3)

A
  1. Other firms hike price too = peace and profits
  2. Other firms don’t follow = price leader will rescind hike
  3. Few firms follow = price leader may punish in form of sharp cuts = next time firms likely to follow
19
Q

Barometric price leadership

A

• 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

20
Q

Penalties for cartels UK

A

Fine of up-to 10% of worldwide turnover

21
Q

Costs of collusive behaviour (3)

A

• Reduced consumer welfare
• X-inefficiency
• Reinforces monopoly power

22
Q

Potential benefits from collusion (3)

A

• Social (E.g. medical research)
• Fairer price for 3rd world nations
• SNP could lead to dynamic efficiency