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.
how firms compete on price: state how a predatory pricing affects competition - long run vs short run
So in the short run, by pricing below shutdown point, a firm incurs a loss. But in the long run, the firm forces out its competitors, so they can put prices back up and take over the entire market.
how firms compete on price: define Limit pricing
when an incumbent firm uses its economies of scale to set a price low enough tolimitnew firms from entering.
how firms compete on price: state how limit pricing will effect competition in the market for small firms
Small new firms without any economies of scale, won’t be able to compete or make a profit so they’ll stay out of the market.
State 4 main types of non price competition and describe them
- Advertising- big firms are always releasing new adverts to compete and steal a competitors customers, without changing prices
- Loyalty card - big supermarkets now issue loyalty card ton their customers e.g. Tesco loyalty cards, providing money off purs=chances/ free Lego land tickets = helps compete with others
- Branding - branding attracts customers e.g. Frosties with the tiger
- Quality - firms can compete on quality. They can invest in R&D and increase dynamic efficiency = helps develop high quality products with new features. BUT To be able to invest into R&D and improve quality, firms need to makesupernormal profitso they have extra profit available for investment.(AR>AC)
Why is there uncertainty in an oligopoly market
decisions by one firm in the industry impact all of the other firms/ it is hard topredictthe decisions of other firms = uncertainty
What is a solution to uncertainty in an oligopoly market
Collusion
State the difference between a collusive oligopoly and non collusive oligopoly
- collusive oligopoly, firmscollude in order to set thesame prices whereas firms
- non-collusive oligopolycompeteto undercut each other on prices.
Despite collusion being illegal, are firms still able to work together, yes or no?
Yes
What does a kinked demand curve show
Interdependence between firms and price stability in an oligopoly market
what does the first half of the kinked demand curve show and state what will happen if firms are in this part of the curve/ what this means for quantity demanded
Price elastic demand
- because of substitutes = consumers will switch to cheaper substitutes = low quantity demanded
What does the second half of the kinked demand curve show and state what will happen if firms are in this part of the curve/ what this will means
Price inelastic demand because of competition. If the firm decreases its price, the competitor will also decrease its price = there will be very little change in the quantity demanded
Is there incentive for firms to change their prices in an oligopoly, yes or no?
No
Define price rigidity
When firms don’t change their prices and prices rain fixed
