Oligopoly

Question 1

What are the characteristics of an oligopoly

Answer 1

o high barriers to entry and exit
o high concentration ratio
o interdependence of firms
o product differentiation

Question 2

Explain the kinked demand curve

Answer 2

• When price is above P, it is elastic and firms will simply lose market share
• When price is below P, firms will follow suit and demand will be inelastic. Therefore in the long run firms will not have gain any market share and just lose revenue
• This is why firms may decide to use non price competition

Question 3

What are some reasons for collusive behaviour

Answer 3

1 - Achieving higher profits
If firms collude, they can avoid price wars and combine monopoly power.
This can allow them to restrict output and increase price
Higher SNP
Higher SNP can allow for RnD or higher dividends

2 - Reduced Uncertainty
If firms collude, they can avoid unexpected non-price/price strategies from other firms
Hence, collusion will allow for a structured strategy for long term SNP

3 - Higher SNP can be used to increase barriers to entry by investing into Economies of scale or marketing

Question 4

What is overt collusion

Answer 4

Firms agree to restrict competition via a formal agreement

Question 5

What is meant by a cartel

Answer 5

Formal agreement between firms to limit competition in a market

Question 6

What is meant by tacit collusion

Answer 6

An informal agreement to restrict competition

Question 7

What is predatory pricing

Answer 7

• Anti comp strategy to force rivals out of a market and acheive greater market share

Question 8

Evaluate predatory pricing

Answer 8

• Face legal scrutiny, face fines.
• May damage brand image in the long term

Question 9

What is limit pricing

Answer 9

• Where incumbent firms set price below new entrants AC.
• New firms will see entering the firm as a cost disadvantage
• Incumbent firms will be able to sustain the short term loss
• Hence, the new firm will not enter and the incumbent firm holds market share

Question 10

Evaluate limit pricing

Answer 10

• New firms may offer a better product due to heavy investment in R&D prior
• New firms may also have retained profits from other industry
• These profits can be used to sustain a loss or utilise economies of scale

Question 11

What are price wars

Answer 11

• Where firms repeatedly undercut prices in order to maintain market share

Question 12

What is non price competition

Answer 12

• Strategies which include using other elements of the marketing mix, such as place promotion and product

Question 13

How is advertising a form of non price competition

Answer 13

• Increases consumer awareness
• Strong branding can diff a good and can also build strong brand loyalty
• This brand loyalty can allow firms to have stable prices and avoid price wars
• Leading to higher profit margins

Question 14

Evaluate advertising as a form of non price competition

Answer 14

• High upfront costs for advertising may not guarantee success.
• Lack of information may lead to incorrect market targeted and it would be a total waste

Question 15

How is product differentiaion a form of non price competition/innovation

Answer 15

• Where firms introduce innovate in order to add unique characteristics to their products
• ## Differentiation may create a perception of higher value, allow for higher prices to be charged

Question 16

Evaluate product diff/ innovation

Answer 16

• Competitors may imitate these advantages.
• Costly to implement and it is a long term approach, this may allow firms to also innovate during this time period