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A Level Economics > Oligopoly > Flashcards

Oligopoly Flashcards

1
Q

Oligopoly

A

A market structure in which a few, but very large, firms dominate(these firms have monopoly power due to their size)

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2
Q

Oligopoly characteristics

A
  1. Many buyers, but only a few dominant sellers
  2. Asymmetric/imperfect information
  3. High barriers to entry and exit
  4. Non-homogeneous goods(highly differentiated products)
  5. Interdependent decision making
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3
Q

CMA

A

Competition
Market
Authority
This regulator decides that collusion between big firms is illegal(e.g. if firms sat down and spoke together, to fix prices for groceries and to fix the quantity of goods)

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4
Q

Examples of CMA intervention

A

2018- Sainsbury’s tried to merge with Asda- this case was taken up by the CMA,who stopped this case(whole merger failed)

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5
Q

Negative impacts of mergers/collusion between firms

A

Reduced competition: limited choice for consumers(prices tend to be set very high): reduced variety

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6
Q

Big Six(Oligopolistic market)

A
  1. Tesco = 27% of market
  2. Sainsbury’s= 15% of market
  3. ASDA=13% of market
  4. Aldi= 10% of market
  5. Morrison= 9% of market
  6. Lidl - 8% of market
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7
Q

Price matching

A

This is what interdependent firms do, because they realise they’re working in an oligopolistic market, and want you to buy products from them

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8
Q

Mystery shoppers

A

People employed by one firm to get information, as part of price matching(is illegal)

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9
Q

Interdependence

A

Firms taking into account the likely reactions of their rivals to any change in price, output or forms of non-price competition

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10
Q

Why do oligopolistic firms prefer non-price competition to price competition?

A

Prices tend to be sticky/rigid-
firms shouldn’t bother to change prices

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11
Q

Non-price competition in an oligopoly

A

Loyalty(nearly all firms in an oligopolistic market have loyalty cards - to avoid losing out to competitors)

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12
Q

Example of oligopoly

A

The Big 6- the large energy suppliers of most of the energy to domestic households in the UK market:
1. Scottish Power
2. SS3
3. e.on
4. EDF
5. NPOWER
6. British Gas

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13
Q

How can an oligopoly be understood:

A

Through behaviour(guessing what competitors are doing, or of interdependent decision making and maintaining high barriers to entry through lots of advertising and branding),
Or structure e.g. the structure of 3-5 dominant firms controlling more than 60% of the market

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14
Q

Market share

A

Proportion of market you occupy on the basis of sales, profit, customers and size(number of stores)

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15
Q

Examples of duopolies

A

Boeing, Airbus(these firms dominate the aircraft market)

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16
Q

Market power

A

One way of measuring the potential economic power of the producers with an industry, is to calculate the relative market share of the top few companies in the market

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17
Q

Concentration ratio

A

Measures the combined market share of the top ‘n’ firms in the industry(the value of ‘n’ is often 4 or 5)

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18
Q

The Herfindahl-Hirschman Index

A

Another measure of market concentration.
This is calculated by squaring the % market share of each firm in the market and summing these numbers

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19
Q

CMA HHI

A

The CMA suggests a market with a HHI exceeding 2,000 can be characterised as ‘highly concentrated.’

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20
Q

The lower the HHI index…

A

The more competitive the market is, can reach almost zero for perfect competition

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21
Q

Monopoly HHI

A

The index can be as high as 10,000 if the market is a pure monopoly

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22
Q

Example of oligopolistic market(number 3)

A

Telecoms market:
BT-32% of market share
Sky - 22% of market share
Virgin Media - 20% of market share
Talk Talk - 14% of market share
EE-4% of market share
Others - 8% of market share

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23
Q

Monopoly concentration ratio

A

100%

24
Q

Oligopoly concentration ratio

A

80%

25
Q

Competitive market

A

Less than 60% concentration ratio

26
Q

Perfect competition

A

Comcentration ratio - less than 50%

27
Q

What do oligopolistic firms want?

A

They deliberately want to be more concentrated

28
Q

Would firms in all oligopolies prefer to be the only firm in the market?

A

Yes - Google would want to be the only search engine

29
Q

What are whole free market economies like the UK and America dominated by?

A

Oligopolies, who try to concentrate the market they’re in by merging and acquisitions, knowing regulators which claim concentration should only happen to a point

30
Q

CMA Criteria

A

Depends on consequences for consumers e.g. if firms were to merge, they have to write a proposal on why this would benefit consumers, and send this to the CMA to judge

31
Q

Google v CMA

A

Google are under threat to break up and lose bits of their business, because the American version of CMA believes Google has become a monopoly abusing their monopoly power. Google’s lawyers continue fighting through against the CMA

32
Q

When do the CMa intervene?

A

If the concentration ratio in an oligopolistic market is seen as a threat to consumers

33
Q

Worst form of collusive behaviour

A

Price fixing

34
Q

Positives of oligopolies

A

Wider choice for consumers due to differentiated products, non-price competition(better quality, more innovation, more customer loyalty), firms likely to be dynamically efficient(are profit maximisers that can earn supernormal profits, which they can reinvest into making more products), meaning economies of scale(lower unit prices)- benefits consumers

35
Q

Negatives of oligopolies

A

Price fixing activity is worse form of collusion, high barriers to entry and exit(less competition), asymmetric information(secrets to themselves)

36
Q

Oligopolies only care about..

A

Maximising profit - firms knowingly sell dangerous products such as cigarettes

37
Q

Long run supernormal profit in oligopolies - impact on consumers

A

Higher prices, limited choice(or if these were given to shareholders as dividends), but if supernormal profits were being reinvested to gain economies of scale(dynamic efficiency), lower unit prices would benefit consumers

38
Q

Few dominant firms in oligopolies-
impact on consumers

A

Less competitive(worse quality products and higher price for products) limited choice for consumers

39
Q

Few dominant firms in oligopolies - impact on firms

A

Firms can take over whole market for themselves unless CMA stop them e.g. Apple/Google would love to be the only firms in the market, but this would lead to them abusing market power against consumers

40
Q

Interdependent decision making - impact on consumers and firms

A

Stops price competition - consumers receive better quality products and more choice when prices are lower, but this harms many firms

41
Q

Oligopoly non-price competition: impact on consumers and firms

A

Beneficial for consumers - better quality products
Firms are benefitted - ensured customer loyalty

42
Q

Oligopoly high barriers to entry and exit - impact on consumers and firms

A

Less competition - more harmful to consumers, but more profit for individual firms

43
Q

Efficiency in an oligopoly

A

Failure of allocatively efficiency - price is greater than marginal cost
Failure of productive efficiency - not producing at lowest point of average cost curve
Failure of X efficiency
Welfare loss - can’t meet allocative or productive efficiency

44
Q

Where may some collusion be in the public interest?

A

In the joint development of a product. This is because costs are lowered(through economies of scale), but consumers get more choice.

45
Q

Do authorities encourage collusive behaviour?

A

Authorities don’t encourage collusive behaviour( is illegal), but if they think collusive behaviour may benefit consumers, they may turn a blind eye.
E.g. The police do nothing about petty crimes such as shoplifting.

46
Q

Types of collusion

A

Covert(undercover - in secret)
Overt(openly)
Cartel
Tacit collusion

47
Q

Cartel

A

A group of firms colluding - formal collusion. In effect, cartels create a monopoly market(due to collusion), as there’s no real competition, oligopolistic firms collude to keep prices high(to earn supernormal profits at the expense of consumers) .

48
Q

Example of cartel

A

Organization of the Petroleum Exporting Countries: Restricted supply of energy, seen as the UK are struggling with cost of living, with the worst cost energy(electricity and gas): older people suffer the most with cost of living, because they need homes to be a bit warmer

49
Q

Tacit collusion

A

This is where there’s an implicit understanding by firms, but no explicit agreement is made e.g. firms might watch competitor prices carefullt, but all recognises if no-one engages in price competition, it’s better for all of them.

50
Q

Price Leadership:

A

The most dominant firm becomes the price leader, and the others become price takers.

51
Q

Example of price leadership(oligopolistic market)

A

Apple’s the price leader in the telecoms market - but other firms in a telecoms market don’t privately accept Apple’s the price leader

52
Q

Grocery oligopoly in UK

A

Lots of collusive behaviour(maybe tacitly): difficult to find price leader, prices fixed in this market

53
Q

Kinked demand curve

A

Helps us show the impact of interdependence in an oligopoly market, and why non-price competition is so important. Price and quantity demanded are fixed at a kink(two demand curves connected together), showing the sticky prices we see in oligopolistic markets.

54
Q

Kinked demand curve - increased price

A

Increased price = Elastic demand = Lower revenue(due to lost market share).
If the firm increases the price, competitors are unlikely to follow the price change and therefore consumers will swap to the competitors.
Demand falls by a greater proportion than the price rise.

55
Q

Kinked demand curve - decreased price

A

Decreased price = Inelastic demand = Lower revenue
If the firm decreases the price, competitors will follow and also drop their prices, so most consumers are unlikely to swap brands.
The price drop is proportionally greater than the increase in demand.

A Level Economics (13 decks)

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