Oligopoly Flashcards
What is oligopoly?
A market structure dominated by 3 to 7 firms, it can have many firms but the market share is dominated by a few firms
What is interdependence and what does this do to the demand curve?
The behaviour and decisions of one firms impacts the behaviour and decisions of other firms. This means the demand curve is kinked
What happens if a firm decreases price?
There will be an inelastic response, the percentage decrease in price will be greater than the percentage increase in demand. This is because other firms will react and do the same therefore no one gains market share
What happens if a firm increases price?
Other firms will keep their price the same as they will be cheaper than the firm which increased price. Due to only a few firms dominating the market consumers will be aware of this and switch.
This is an elastic response, the percentage increase of price is less than the percentage decrease of demand
Why do oligopolies compete on product differentiation and what allows them to do this?
They compete on product differentiation because they cannot compete on price due to interdependence. They can product differentiate as they have supernormal profits and competition
Why is MR positive up until the kink and why does it become negative after it?
It is positive because every increase in output leads to increases in total revenue, then after the kink it becomes negative as each unit reduces total revenue.
Positive when elastic and negative when inelastic
Are oligopolies statically efficient?
No, they do not meet allocative efficiency at AR=MC, and they are not productively efficient at AC=MC
Are oligopolies dynamically efficient?
Yes they have supernormal profits and competition to incentivise dynamic efficiency but they may choose to brand rather than improve their product
What is a collusive oligopoly?
When firms in an oligopolistic market work together to set price and output, leading to monopoly behaviour
What’s the difference between overt/ cartel and tacit collusion?
Overt or cartel means a formal agreement is made
Tacit means collusion occurs through behaviour rather than formal agreement
In which kinds of markets would oligopolies work best?
In a market which benefits greatly from technological improvements like medicine or AI, though it’s also important to consider that oligopolies underallocate
Does collusion mean each firm is profit maximizing?
No, the firms work together to find market profit maximisation instead
Why are collusive oligopolies sometimes called complex monopolies?
Because they behave very similarly to a monopoly and have the same inefficiencies as a monopoly
What is price leadership collusion?
A form of tacit collusion where firms follow the pricing and supply of a market leader
Can collusive oligopolies still be dynamically efficient?
Yes but only under an informal agreement (price leadership). In formal collusion there is no more incentive to invest as competition has formally ended
What are 5 conditions that make collusion more likely?
- A higher market concentration as fewer firms makes it easier to organise collusion
- High barriers to entry to prevent non-colluding firms from joining and taking away profit
- Stable demand, no sudden decrease in demand
- Large number of consumers to reduce competition
- All firms have to benefit from maintaining the collusion so it isnt broken
