Oligopoly Flashcards
What are the main characteristics of oligopolistic markets?
1)Few Firms: A small number of firms dominate the market, leading to high concentration ratio
2)Interdependence: Firms are interdependent, meaning the actions of one firm can significantly impact the others (price rigidity)
3)Product Differentiation: Products may be homogeneous or differentiated, allowing firms some degree of market power
4)High Barriers to Entry: Significant obstacles prevent new firms from entering the market, such as high startup costs or strong brand loyalty
5)Price Rigidity: Prices tend to be stable due to the kinked demand curve model, where firms are reluctant to change prices
How do concentration ratios relate to oligopolistic markets?
Concentration ratios measure the total market share held by the largest firms in an industry. A high concentration ratio indicates that a few firms dominate the market, which is typical of oligopolistic markets. For example, a five-firm concentration ratio of over 50% suggests an oligopoly
What is the difference between collusive and non-collusive oligopoly?
Collusive Oligopoly: Firms cooperate, either explicitly or implicitly, to set prices, limit production, or divide markets to maximize joint profits. This can lead to higher prices and reduced competition.
Non-Collusive Oligopoly: Firms compete independently without formal agreements, often leading to competitive pricing and innovation.
What is the kinked demand curve model?
The kinked demand curve model suggests that in an oligopoly, firms face a demand curve with a “kink” at the current price. If a firm raises its price, competitors do not follow, leading to a significant loss in market share. If a firm lowers its price, competitors match the reduction, resulting in minimal gain in market share. This leads to price rigidity in the market.
What are the reasons for non-price competition in oligopolistic markets?
Firms in oligopolistic markets engage in non-price competition to differentiate their products and avoid price wars. Strategies include:
• Advertising and Promotion: Building brand recognition and loyalty.
• Product Differentiation: Enhancing product features, quality, or design.
• Customer Service: Providing superior service to attract and retain customers.
What factors influence prices, output, investment, and advertising in oligopolistic industries?
In oligopolistic industries, decisions on prices, output, investment, and advertising are influenced by:
1)Interdependence: Firms consider competitors’ potential reactions to their actions.
2)Market Share Objectives: Firms may aim to increase or defend their market share.
3)Barriers to Entry: High barriers can limit the threat of new entrants, affecting strategic decisions.
4)Regulatory Environment: Government policies can impact pricing and investment strategies.
What are the advantages and disadvantages of oligopoly?
Advantages:
1)Economies of Scale: Large firms can reduce costs per unit.
2)Innovation: Firms may invest in research and development to differentiate products.
Disadvantages:
1)Price Rigidity: Prices may remain stable, potentially leading to allocative inefficiency.
2)Potential for Collusion: Firms might engage in anti-competitive practices, harming consumers.
What is game theory, and how is it applied in economics?
Game theory is a mathematical framework used to analyze strategic interactions among rational decision-makers. In economics, it helps predict outcomes in situations where individuals or firms make interdependent decisions, such as pricing strategies, market competition, and negotiations.
What are some conclusions for oligopoly’s
1) Temptation to collude
2) Incentive to cheat on collusive agreement
3) Price competition despite not making sense
Factors promoting collusive oligopoly
1) Small no of firms
2) Similar costs
3) High barriers to entry
4) Ineffective competition policy
5) Consumer loyalty
Factors promoting competitive oligopoly
1) Large no of firms (harder to organise collusion)
2) New market entry possible
3) One market with significant cost advantages
4) Homogenous goods
5) Saturated markets
