Oligopoly Flashcards
Characteristics of an oligopoly (5)
High barriers to enter/exit
Slightly heterogenous but in highly conc. = homogenous (supermarkets)
Interdependent
Very few firms
Top 5 = 60% of market share
Define oligopoly (2+)
Market dominated by a few companies
Use competitive or collusive strategies to make interdependence work to their advantage
What is a conc. ratio
Ratio of the combined market shares of a given number of firms to the whole market size
How to calculate conc. ratio (3)
Add up sales of top 3-5 firms
Divide by total market sales
X100%
Why do oligopolies collude (2)
Strong incentives
Agreements to restrict comp. To max own benefits
What has collusion led to (3+)
Higher prices and higher profits
Restrict output
Collude to fix output at a level which maximiser sprofits
Types of collusion (2)
Overt / formal
Tacos / informal
What is overt collusion (4++)
When firms make agreements to limit competition
Agree to limit output to raise prices
Open for everyone to see = OPEC attempts to manipulate world price of oil by restricting supply
Production limits or price fixing
What is a cartel
Wide ranging agreement is made amongst several firms within a market
For a cartel to function what (3)
Agreement must be reached
Cheating is or£vented
Potential competition is restricted
What is tacit collusion (3)
Firms don’t make formal agreements about cooperating
Each firms monitors behaviour closely
Unwritten rules = become practise + custom
Tacit collusion example (3)
Price leadership - one firm sets price and others follow
Firms don’t try and take customers from others
Advertising expenditure is kept low
Easy simple description of types of collusion (2+)
Overt / formal = actually chnaged
Tacit / informal = “just so happens”
What is price competition (3)
Price wars
Predatory pricing = price at a loss
Limit pricing = price low to make normal profits
Price wars in short run + long run (2+)
SR = Firms stay in market = cover variable costs
LR = firms leave or demand increases = prices rise as supply falls
Predatory pricing (4+)
Est. firm in a market is threatened by a new entrant
Est. firm responds = setting such a low price that the new entrant cannot make enough profit = drive the new entrant out of the market
Once this is achieved prices return to normal
Used as a way to defend market share
Price wars (2)
Occur in markets where non price competition is weak
They drive prices down to levels where firms are frequently making losses
Limit pricing (3+)
Larger firm reduces prices to the extent where they themselves can make a normal profit but new entrants are discouraged
The limit price is greater when there are higher barriers to entry to the market = less likely that a new entrant would try and enter the market in the first place
Non price competition (5+)
Advertising / marketing
Quality
Sustainability
Differentiate goods
Location = convenience + sell online
