Oligopoly Flashcards
state the characteristics of an oligopoly
- There market is dominated by a few largesellers!
- High barriers to entry/exit = so it’s hard for new firms to enter the market.
- is differentiated goods. All goods must be similar but slightly different.
- interdependence of firms: one firm’s actions willdirectlyaffect another firm
define concentration ratio
the combined market share of the top few firms in a market
if the concentration ratio is high, what does this mean and why
The higher the concentration ratio, the less competitive the market = fewer firms are supplying the bulk of the market.
how firms can compete on price: define price wars
when firms repeatedly reduce their prices below that of their competitions with the aim of offering lowest price in the market.
how firms can compete on price: state the effect of price wars - consumers vs firms
benefits consumers - lower prices vs firms - detrimental to the profits = destroys firms profits
how firms can compete on price: how can firms avoid price wars
firms may collude
define collusion
when two or more firms agree to limit competition by fixing their prices = will not be worried about what their competitors are doing
state the two types of collusion
Overt collusion and Tacit collusion
define overt collusion and state whether this type of collusion is legal
Overt collusion is when there’s a formal agreement between firms to collude.
- illegal
state why over collusion may be hidden and how despite being hidden they could still be found out
- this formal agreement will typically be kept hidden + the CMA typically fines companies that are found colluding because overt collusion encourages firms to avoids competition and Set their prices high, negatively affecting consumers.
- But even when hidden, the CMA can still find out or the firm could whistle blow. By whistle-blowing, you get immunity from fines and the competitors you are colluding with losses their profits
state an example of overt collusion (BA and Virgin Atlantic)
British Airways and Virgin Atlantic colluded to increase ticket prices but kept it hidden. Regulators noticed high prices and started an investigation. They struggles to find evidence until a Virgin Atlantic member below the whilst and confessed to the CMA. By whistle blowing, Virgin Atlantic were offered immunity format eh CMA’S fines.
- BA got a £270m fineD
define tacit collusion
When the firms don’t communicate at all. They only know keeping the prices the same is what’s best for for both firms profits
- cutting price will lead to a price war
- Increasing price will loose theme customers
state the two main ways of pricing strategy and describe this two ways
- Price leadershipoccurs as a result oftacit collusion = has nocommunication- firms still end up charging the same prices because they follow the price set by theprice leader.
- Price agreementoccurs as a result ofovert collusion. Overt collusion is open with some form ofcommunication.
state the 3 main ways firms can compete on price
- Limit pricing
- Predatory pricing:
- price wars
how firms compete on price: define Predatory pricing
when a firmcuts its pricesbelow AVC (below the shutdown point)toforce outcompetitors from the market.
