oligopoly

Question 2

characteristics of oligopoly

Answer 2

potential for collusion, product differentiation, few firms, barriers to entry, concentration ratio >50%

Question 3

Cooperative outcome

Answer 3

An equilibrium in a game where the players agree to cooperate.

Question 4

Dominant strategy

Answer 4

dominant strategy is one where a single strategy is best for a player regardless of what strategy other players in the game decide to use

Question 5

Nash equilibrium

Answer 5

Any situation where all participants in a game are pursuing their best possible strategy given the strategies of all of the other participants.

Question 6

Tacit collusion

Answer 6

Where firms undertake actions that are likely to minimize a competitive response, e.g. avoiding price-cutting or not attacking each other’s market.

Question 7

Whistle blowing

Answer 7

When one or more agents in a collusive agreement report it to the authorities.

Question 8

Zero sum game

Answer 8

An economic transaction in which whatever is gained by one party must be lost by the other.

Question 9

Break-even price

Answer 9

reak-even price is when price = average total cost (P=AC).

Question 10

cost plus pricing

Answer 10

Where a firm fixes the price by adding a fixed percentage profit margin to the average cost of production

Question 11

Limit pricing

Answer 11

Limit pricing is pricing by a firm to deter entry or the expansion of fringe firms. The limit price is below the short run profit maximising price but above the competitive level.

Question 12

Peak pricing

Answer 12

When a business raises its prices at a time when demand has reached a peak might be justified due to higher marginal costs of supply at peak times.

Question 13

Penetration pricing

Answer 13

Pricing policy used to enter a new market, usually by setting a low price.

Question 14

Predatory pricing

Answer 14

Predatory pricing is a deliberate strategy of driving competitors out of the market by setting low prices or selling below average variable cost.

Question 15

Price leadership

Answer 15

A situation where prices and price changes established by a dominant firm, or a firm are usually accepted by others and which other firms in the industry typically adopt and then follow.

Question 16

Abnormal profit

Answer 16

any profit in excess of normal profit - known as supernormal profit

Question 17

altruism

Answer 17

disinterest and selfless concern for the well-being of others

Question 18

Collusive oligopoly

Answer 18

When several large firms in an industry act to restrict price or output or share out the market

Question 19

concentration ratio

Answer 19

measures the combined market share of threaded firms in an industry

Question 20

Duopoly

Answer 20

Market dominated by two rival firms

Question 21

First mover advantage

Answer 21

When a business can develop a competitive advantage through early entry into an industry

Question 22

Interdependence

Answer 22

When firms must take into account the likely reaction of rivals to changes in price and output

Question 23

Joint profit maximisation

Answer 23

price fixing with the aim of achieving outcome associated with pure monopoly

Question 24

Conditions when price-fixing cartels are likely to happen in an oligopoly

Answer 24

1. Industry regulators are ineffective – this is an example of regulatory failure.
2. Penalties for collusion are low relative to gain in profits - fines therefore do not act as a proper deterrent.
3. Few firms in the market and price inelastic demand (PED<1) – higher prices then lead to increased revenues. 4. Participating firms have a high percentage of total sales – this allows them to control market supply.
4. Firms can communicate well and trust each-other – this is helped by having similar strategic objectives.
5. Products are standardized and output within the cartel is easily measurable so that supply can be controlled. 7. Brands are strong so that consumers will not switch demand when collusion raises pri

Question 25

tacit collusion

Answer 25

when businesses co-orperate but not formally, e.g quiet or implied co-orperation

Question 26

open collusion

Answer 26

Overt means spoken, open or traceable.

Question 27

example of collusion

Answer 27

French champagne cartel controls yields to prevent price falls

Question 28

causes of cartel break down

Answer 28

Enforcement problems:
o The cartel aims to restrict production to maximize total profits.
o But each individual seller finds it profitable to expand their production.
o Other firms who are not members of the cartel may take a free ride by selling under the cartel price
* Falling market demand – for example during a recession – which creates excess capacity in the industry, and this then puts downward pressure on profits and cash-flow in the cartel.
* The successful entry of non-cartel firms into an industry undermines a cartel’s control of the market.
* The exposure of price-fixing by whistle-blowing firms – i.e. firms engaged in a cartel that pass on information
to the competition authorities in the hope of more lenient treatment. In the UK, whistle-blowers can be rewarded up to £100,000 for reporting cartels, with any payment depending on the value of the information and the harm done to consumers by a cartel’s existence.

Question 29

Costs of Collusive Behaviour

Answer 29

Damages consumer welfare
o Higher prices lead to lost consumer surplus
o Loss of allocative efficiency since prices are well above marginal cost
o Hits lower income families – i.e. has a regressive impact on poorer households
* Absence of competition hits efficiency
o X-inefficiencies leads to higher unit costs
o There is less incentive to innovate / loss of dynamic efficiency o Output quotas penalise those firms who want to expand
* Reinforces the cartel’s monopoly power
o Harder for new businesses to enter the market – this reduces market contestability in the long run

Question 30

Potential Benefits from Collusion

Answer 30

General industry standards can bring social benefits from
o Pharmaceutical research
o Improved car safety technology
o Reduced waste e.g. attempts to use industry standards to lower the volume of plastic waste
* Fairer prices for producer cooperatives in lower and middle-income developing countries
o Competing more effectively with powerful corporations who have monopsony power
o This may help in reducing rates of extreme income poverty and increase household savings
* Profits have value – a key question is how are they used?
o Might help fund increased spending on research and development – leading to dynamic efficiency o Might lead to higher wages for employees – increased consumption and saving

Question 31

cartel

Answer 31

an agreement between firms on price and output with intention of maximising joint profit

Question 33

disadvantage of oligopoly

Answer 33

High barriers to entry resulting gin fewer new entrants to the market, less consumer choice

risk of collusion which means they could set higher prices which reduces consumer surplus

Question 33

benefits of oligopoly

Answer 33

higher supernormal profits could be used to develop new and improved services

price wars - lower price for consumers