Oligopoly Flashcards
what is oligopoly
an industry or market that is dominated by a few firms
what are the characteristics of oligopoly
-high barriers to entry
-high market concentration ratios
-price maker
-collusive behaviour
-interdependence of firms
what is the concentration ratio
it measures the percentage of output or sales of a group of firms in a given industry.
what is overt (formal) collusion
firms sign an open agreement fixing either price or output or both
aka cartel
what is an example of overt collusion (cartel)
OPEC - cartel of 12 oil producing nations who aim to safeguard the income of the members by controlling supply
what is covert collusion
where firms meet secretly and agree to set prices or output level
what are two examples of covert collusion
-sainsbury’s and asda fined for colluding to fix the price of milk and dairy products
-BA fined for price fixing fuel surcharges with virgin
what is tacit collusion
where there is no formal agreement to keep prices stable but firms operate in a manner that suggests collusion
what is the game theory example
two companies, X and Y, are the only sellers of a product, both with 50% market share
-Y charges £2.00 and X charges £2.00 both get £10million
-Y charges £1.80 and X charges £2.00 Y gets £12million and X gets £5million
-X charges £1.80 and Y charges £2.00 X gets £12million and Y gets £5million
-X and Y charge £1.80 they both get £8million
dominant strategy is to charge the lower price
both firms have the incentive to covertly collude and keep the price at £2 or they could tacitly collude
but both firms still have the incentive to be the first to move to the lower price.
this could only be sustained in the short term leading both worse off in the long run as the other firm would also cut prices
could lead to a price war
what are some limitations of game theory
-only show effects of one round
-only shows two players
-focuses on price strategy when in reality there are many price and non-price strategies a firm can pursue
what is predatory pricing
when a firm sells a good or service below the AVC of production in order to remove a competitor from the industry
what is limit pricing
when a firm sets a price below the AC of new entrants to deter new entrants from entering the industry
what are the 4 non-price competition strategies in oligopolistic markets
-advertising
-product differentiation and innovation
-branding
-consumer loyalty cards
why do oligopolistic markets use non-price strategies
to avoid price wars
how does advertising work as a non-price strategy in an oligopolistic market
and
what is a problem with it
increased awareness of product –> increases demand –> shifts demand/AR out –> increased revenue and profits
it is a large sunk cost
increased demand is not guaranteed
how does product differentiation and innovation work as a non-price strategy in an oligopolistic market
and
what is a problem with it
updating product ranges keeps them ahead of competition
innovated products make them more appealing to customers
very expensive and there are time lags due to research and testing
how does branding work as a non-price strategy in an oligopolistic market
and
what is a problem with it
strong brand image (e.g via celebrity endorsements) and customer loyalty makes demand inelastic so firms can charge higher prices
brand image is expensive to create and takes a long time to establish
it can easily be damaged
how do customer loyalty cards work as a non-price strategy in an oligopolistic market
encourages repeat visits via rewards
helps get customer info about spending habits
what is third degree price discrimination
charging different groups of consumers different prices for the same good or service
e.g cinema tickets, train fares
what are the conditions for third degree price discrimination
-the firm must have market power
-the firm must be able to separate the market e.g by gender, age
-the buyers must have different price elasticities of demand
-the firm must be able to prevent resale and leakage
