Oligopoly Flashcards
What are the four characteristics of oligopoly market structure?
- Few large sellers
- Differentiated products
- High barriers
- Interdependace
What are sunk costs? Give example
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 .
What is meant by interdependence?
The action of one firms , the choice a firm makes will directly affect another firms choice and decision.
What is meant by oligopoly?
A few large sellers dominate the market and are heavily reliant on each others actions and interdependent with each other.
When demand is inelastic , an increase in price will..
Increase TR
When demand is inelastic a decrease in price will…
Decrease TR
WHAT is meant by the term game theory?
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.
What is meant by collusion?
When firms choose to agree on the price that they will be selling their goods for? A firm set agreement
What is a price war?
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
To avoid price wars , firms ….
Agree to collude and set a price.
Overt collusion?
A formal agreement between firms, eg: contract , firms agree with each other.
Context : example of covert collusion.
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.
Evaluation point for overt collusion:
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
Tacit collusion
An unspoken agreement between firms to stabilise prices
What are the 3 types of price competition
- Price wars
- Predatory pricing
- Limit pricing
Explain predatory pricing
When a firm aggressively cuts prices , even below its short run shutdown point which is equal to AVC=AR
Show mathematically the effect of predatory pricing
AR(price) < AVC
Price < shutdown point
Explain Limit pricing
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.
What are the four types of non price competition
1.Advertising
2. Loyalty cards
3.Branding
4. Quality.
In order to improve quality , what does a firm need to be doing?
AR > AC
They have to be making supernormal profits in order for them to keep innovating and making new and better equipment.
EXPLAIN THE implication of high barriers of entry in an oligopoly market?
- 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.
Implication of a high concentration ratio?
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.
Implications of a firms interdependence in oligopoly ?
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
Implications of product differentiation ?
Using factors like quality , branding , avertisement and things like customer service …
Sell their brand / business more than the other
