oligopoly

Question 1

what are the characteristics of oligopolistic markets

Answer 1

a market structure in which a few large firms dominate the industry with each firm having significant market power and the concentration ratio of the top 5 firms is usually high

Question 2

what level of Market power does a oligopoly have

Answer 2

firms in oligopoly market experience a higher degree of Market power and the Markey share is more concentrated

Question 3

what are the characteristics of an oligopoly ?

Answer 3

high barriers to entry / exit
high concentration ratio
interdependence of firms
product differentiation

Question 4

what is meant by high barriers to entry/ exit

Answer 4

-Entering the industry is difficult due to the existing dominance of relatively few firm

-Start-up costs tend to be high e.g. setting up a renewable energy company costs billions

-Leaving the industry is difficult due to the high level of sunk costs e.g. mobile phone companies are bidding billions on 5G auctions run by the government, and they cannot recoup this money if they leave the industry

Question 5

what is meant by high concentration ratio?

Answer 5

-A concentration ratio reveals what percentage of the total market share a specific number of firms have
-A 10-firm concentration ratio reveals the total market share (concentration) of the top 10 firms in the industry
A 5-firm concentration reveals the total market share (concentration) of the top 4 firms in the industry
-The higher the value and the lower the number of firms, the more concentrated the market power in the industry, e.g. the UK supermarket’s 5-firm concentration ratio is constantly around 67%

Question 6

what is meant by interdependence of firms ?

Answer 6

-With relatively few competitors, firms study each other’s behaviour and are highly interdependent in their actions
-This interdependence generates the use of game theory
-There is a strong incentive to collude, as this will lead to greater profits
-There is little incentive to compete on price, as this does not change each firms market share by much and lowers profits

Question 7

what is meant by product differentiation?

Answer 7

Products tend to be highly differentiated
Occasionally, products are similar (e.g. petrol). However, the brand around the product is highly differentiated to the point where consumers perceive it as different and are extremely brand loyal

Question 8

what do concentration ratios reveal?

Answer 8

Concentration ratios reveal what percentage of the total market share a specific number of firms have,e.g the five-firm concentration ratio reveals the market share of the top five firms in the industry

Question 9

what is collusive behaviour in oligopolies?

Answer 9

occurs when firms cooperate to fix prices and restrict output
cease to compete as vigorously
incentive to collude in these markets are high

Question 10

what is non collusive behaviour in oligopolies?

Answer 10

occurs when firms actively compete to maintain/increase market share
Price wars may break out occasionally between competitors
Little is to be gained as competitors can quickly follow each others actions, resulting with very little change in market share but a significant loss in profits, due to the lower prices generated by the price war

Question 11

what are the 2 types of collusion?

Answer 11

overt
tacit

Question 12

when does overt collusion?

Answer 12

occurs when firms explicitly agree to limit competition or raise prices (price fixing)
A cartel is the most restrictive form of collusion and is illegal in most countries

Question 13

what are the consequences of overt collusion?

Answer 13

Higher prices for consumers
Less output in the market
Poor quality products and/or customer service
Less investment in innovatio

Question 14

when does tacit collusion occur?

Answer 14

occurs when firms avoid formal agreements but closely monitor each other’s behaviour, usually following the lead of the largest firm in the industry
most common is price leadership - occurs when dominant firm sets the price for its products and services, and other smaller firms in the industry typically follow suit.

Question 15

what is cooperating in oligopolies?

Answer 15

Cooperation is a legal agreement between rival firms to share resources and expertise to achieve a specific goal
It allows firms to increase sales and market share without violating antitrust (anti monopoly) laws
through the sharing of resources, firms reduce the cost of production and benefit economies of scale
This leads to increased innovation, greater choice, and potentially lower prices for consumers

Question 16

what is collusion ?

Answer 16

Collusion is an illegal agreement between rival firms to control price or output
Firms effectively act like a monopoly to maximise profits
Limiting choice or raising prices is an anti-competitive practice that reduces consumer surplus
Regulatory authorities have to monitor and regulate this behaviour to ensure fair outcomes for consumers