Oligopoly

Question 1

What are the four characteristics of oligopoly market structure?

Answer 1

1. Few large sellers
2. Differentiated products
3. High barriers
4. Interdependace

Question 2

What are sunk costs? Give example

Answer 2

Costs that can’t be recovered
1. Advertising - millions on TV adverts , once paid they can’t recover
2. Research and development = trying to create a new recipe .

Question 3

What is meant by interdependence?

Answer 3

The action of one firms , the choice a firm makes will directly affect another firms choice and decision.

Question 4

What is meant by oligopoly?

Answer 4

A few large sellers dominate the market and are heavily reliant on each others actions and interdependent with each other.

Question 5

When demand is inelastic , an increase in price will..

Answer 5

Increase TR

Question 6

When demand is inelastic a decrease in price will…

Answer 6

Decrease TR

Question 7

WHAT is meant by the term game theory?

Answer 7

Economists use it to compare the effects of a firm choosing one price and another firm choosing a different price . It shows the price , loss/ profits that each firm makes after raising or cutting the price of their goods.

Question 8

What is meant by collusion?

Answer 8

When firms choose to agree on the price that they will be selling their goods for? A firm set agreement

Question 9

What is a price war?

Answer 9

This is when firms try to undercut each other by selling their goods for a lower price in hope of increasing Qd and increasing the TR but when both firms do it at the same time, then it means that they begin to make at a loss

Question 10

To avoid price wars , firms ….

Answer 10

Agree to collude and set a price.

Question 11

Overt collusion?

Answer 11

A formal agreement between firms, eg: contract , firms agree with each other.

Question 12

Context : example of covert collusion.

Answer 12

British airways and virgin atlantic.
CMA has made overt collusion illegal as firms agree to set high prices and this therefore affects the consumers as it causes inequality and becomes very unfair for consumers.

Question 13

Evaluation point for overt collusion:

Answer 13

Countries tend to get away with overt collusion because they are so big and powerful.
Overt collusion is a formal agreement between firms to collude

Question 14

Tacit collusion

Answer 14

An unspoken agreement between firms to stabilise prices

Question 15

What are the 3 types of price competition

Answer 15

1. Price wars
2. Predatory pricing
3. Limit pricing

Question 16

Explain predatory pricing

Answer 16

When a firm aggressively cuts prices , even below its short run shutdown point which is equal to AVC=AR

Question 17

Show mathematically the effect of predatory pricing

Answer 17

AR(price) < AVC
Price < shutdown point

Question 18

Explain Limit pricing

Answer 18

By setting the prices so low that you are able to prevent any other firms to compete with you.
By using economies of scale , firms set the AC low meaning they are able to keep their prices low and therefore keeping other firms out.

Question 19

What are the four types of non price competition

Answer 19

1.Advertising
2. Loyalty cards
3.Branding
4. Quality.

Question 20

In order to improve quality , what does a firm need to be doing?

Answer 20

AR > AC
They have to be making supernormal profits in order for them to keep innovating and making new and better equipment.

Question 21

EXPLAIN THE implication of high barriers of entry in an oligopoly market?

Answer 21

• Limited competition , as it’s hard for new firms to enter the market as existing firms can maintain their dominant positions.
• Price control: firms are able to control the price as very few firms can enter the market to challenge the price leads to price rigidity or price leadership.
• Collusion : overt collusion is more likely to occur.

Question 22

Implication of a high concentration ratio?

Answer 22

1.Market dominance by few firms meaning that these firms control a large portion of the market.
2. Price leadership and price rigidity : prices don’t fluctuate , dominant firms have power to keep prices stable.
3. Firms sustain high supernormal profits over the long term , allowing them to set prices above the competitive equilibrium.

Question 23

Implications of a firms interdependence in oligopoly ?

Answer 23

1)Strategic behaviour : highly strategic especially when considering the actions that rivals are making.
2)Price rigidity : firms tend to compete with non price factors and competition rather than on price competition.
3)Non price competition

Question 24

Implications of product differentiation ?

Answer 24

Using factors like quality , branding , avertisement and things like customer service …
Sell their brand / business more than the other