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 increases 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
