Oligopoly Flashcards
What is the definition of an oligopoly?
An oligopoly is a market where a few sellers dominate the market
What are the characteristics of an oligopoly?
Few firms with a high concentration ratio
Barriers to entry are relatively high
Product differentiation
Interdependence between firms
Supernormal profit in short-run and long-run
What is
interdependence?
How firms change their decisions based on the actions around rivals
What is the F-rule?
5 fewer firms control at least 50% of the market
What is the Kinked demand curve?
Based on how firms in an oligopoly market perceive their own demand curve/ base on interdependence
What efficiency is achieved with oligopoly?
Dynamic: SNP used for efficiency
X-efficiency: Actual costs are lower than potential costs
What are the different theories of Oligopoly?
Kinked demand curve, game theory, collusion
What is game theory?
There is a dominant strategy that firms will take to maximise profits,
What is collusion?
Due to small number of firms there is a strong temptation to join together to restrict supply
What are the reasons for non-collusive behaviour?
Lots of firms, new market entry, saturated market, effective regulation, one firm having significant cost advantages
What can collusive behaviour lead to?
Increased prices, SNP, dynamic efficiency
What can non-collusive behaviour lead to?
investment , lower prices , and static efficiency
What is sticky pricing?
the tendency of prices to remain constant or to adjust slowly, despite changes in the cost of producing and selling the goods or services.
What is non-price competition?
a form of competition in which two or more producers use such factors as packaging, delivery, or customer service rather than price to increase demand for their products.
Why do firms focus on non-price competition?
Due to sticky pricing
What are the two downsides of the kinked demand curve?
Does not explain how market price is determined
Does not explain price wars
What are the different pricing strategies?
Predatory pricing , limit pricing , price wars , price leadership
What is predatory pricing?
Offer lower price than cost of production in short run to remove competitors therefore in the long run to increase prices
What is limit pricing
a dominant firm maximizes its profits by choosing a price that is low enough to discourage some but perhaps not all entrants into the market
What are price wars?
a competitive exchange among rival companies who lower the prices on their products, in a strategic attempt to undercut one another and capture greater market share. With a firm retaliating
What is price leadership?
the setting of prices in a market by a dominant company, which is followed by others in the same market.
What is tacit collusion?
a type of collusive behaviour where firms coordinate their actions without explicitly communicating or reaching an agreement
What is open collusion?
type of collusion in which formal and explicit co-operation and agreements take place between rival firms.
What is non collusive behaviour?
Competition of 2 firms, increasing market share
What is interdependence?
Firms changing their behaviour based on competition ( e.g competing on non-price factors)
What factors affect the likelihood collusion?
interest rates, number of firms in the interesting, the frequency of sales, the ease of market entry, regulation
What are ways to reduce collusion?
Increase punishments, whistleblowing, make markets more competitive
