Oligopoly

Question 1

Oligopoly definition

Answer 1

A market structure in which a small number of large firms dominate an industry or sector

Question 2

Characteristics of an oligopoly

Answer 2

1. High barriers to entry and exit
2. High ‘n’ concentration ration
3. Interdependence of firms
4. Product differentiation

Question 3

‘N’ firm Concentration Ratio

Answer 3

A higher concentration ratio indicates fewer dominant firms

Question 4

Reasons for collusive behaviour

Answer 4

1. Maintains high prices, increasing profits collectively
2. Stability: reducing uncertainty for firms and consumers
3. Avoids price wars

Question 5

Reasons for non-collusive behaviour

Answer 5

1. Competition: compete aggressively to gain market share
2. Legal constrains: regulations prohibit collusion
3. Differences in objectives:

Question 6

Overt colusion

Answer 6

Occurs when firms openly agree to cooperate and set prices or output levels (illegal)

Question 7

Tacit collusion

Answer 7

Involves firms behaving in a manner that resembles collusion without any explicit agreement

Question 8

Prisoners dilemma

Answer 8

When one firm betrays another to get maximum profits

Question 9

Types of non price competition

Answer 9

• product differentiation
• advertising and marketing
• customer service
• distribution channels: establishing efficiency distribution networks

Question 10

What assumptions does the kinked demand curve make?

Answer 10

• firms are profit maximisers
• if one firm increases the price, other firms WONT follow suit
• if one firm cuts prices, other firms WILL follow suit. Therefore, for a cut in price, demand is price inelastic

Question 11

What are the limitations of the kinked demand curve?

Answer 11

• it doesn’t explain how the price was arrived at in the first place
• firms may engage in price competition

Question 12

Price discrimination

Answer 12

When a monopoly charges different prices for different groups of consumers.

Question 13

Advantages of price discrimination

Answer 13

Consumers:
- a group could get lower prices
- increased revenue could go towards better services

Producers:
- higher SNP could stimulate investment

Question 14

Disadvantages of price discrimination

Answer 14

Consumers:
- might get higher prices
- strengthens the monopoly power of firms so could result in higher prices in the long run

Producers:
- used as a predatory pricing method
- might cost the firm to divide the market