Oligopoly Flashcards
What are the characteristics of oligopoly?
- Higher barriers to entry and exit
- High concentration ratios
- Interdependance of firms
- Product differentiation
- Price stability
What is the definition of market concentration, market share and concentration ratio?
Market concentration - Degree to which the output of an industry is dominated by its largest producers
Market share - The proportion of sales revenue in a market taken by a firm or a group of firms calculated as (TRfirm/TRmarket) x100
Concentration ratio - The combined market share of the n largest firms in the industry
What is the significance of concentration ratio?
The number of firms in an industry is less important in studying the behaviour of the industry than the economic power of individual producers within the industry
If ratio is high, market is described as highly concentrated and an oligopoly
What is the definition of an oligopoly?
A market where a small number of interdépendant firms compete with each other
What are examples of price competition?
- Price wars - Where firms repeatedly lower their prices to outcompete other firms; objective is to gain or defend market share
- Predatory pricing - Anti-competitive and illegal strategy in which a firm sets price even below average variable cost in SR to force rivals out of market
- Limit pricing - When a firm sets a low enough price to deter new entrants
What are examples of non-price competition?
- Product
- Place
- Promotion
What is the Kinked demand curve theory?
The theory that oligopolists face a demand curve that is kinked at the current price, the effect of this is to create a situation of price stability
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What are the criticisms of kinked demand curve model?
- Initial price/output not explained
- Competitive oligopolists respond to price changes in the manner assumed in the theory
- Research shows oligopoly prices tend to be stable when demand conditions change
- No reliable empirical evidence to support
What is collusion, collusive oligopoly, non-collusive oligopoly and uncertainty?
Collusion - collective agreements between producers which restrict competition
Collusive oligopoly - When firms in an oligopolistic industry form a cartel and collude
Non-collusive - When firms in an oligopolistic industry compete amongst themselves and there is no collusion
Uncertainty - Is a characteristics of competitive oligopoly
What are the reasons for collusive behaviour?
- Joint profit maximisation
- Prevent price and revenue instability, and hence profit uncertainty
- Cut costs of competition
What are the reasons for non-collusive behaviour?
- Desire to increase market share and achieve market dominance
- Stringent regulatory regime acts as a deterrent to collude
What is overt and tacit collusion?
Overt - When firms make agreements among themselves to restrict competition, usually just verbal to avoid detection
Tacit - When firms co-operate without any formal agreement having been reached or even without any explicit communication
What is a cartel?
An agreement between firms on price and output normally with the intention of maximising their joint profits
- usually illegal in most jurisdictions
What are the conditions required for an effective cartel?
- An agreement must be made
- Cheating has to be prevented
- Potential competition must be restricted
- Easier in stable, mature industries
- Demand is fairly price inelastic
What is game theory?
The analysis of situations in which players are interdependant
What is the first mover advantage?
What are the disadvantages?
Simple game theory assumes that both players act simultaneously, however, in reality one player may move first - what advantages are given?
- brand loyalty
- premium pricing - monopoly power
- Need to keep innovating
- Costs (R+D) etc.
- 2nd mover can learn from first movers mistakes
What are the BENEFITS of game theory?
- Helps us understand the benefits of collusion (unstable outcome) and the risk of reneging (stable outcome)
- Straight-forward tool of analysis
- Based on idea or interdependance
What are the COSTS of game theory?
- Assumes players know pay-offs (especially unrealistic in new market)
- Assumes simultaneous decisions
- Assumes two firms only
- Assumes two strategies only
- Assumes both products are the same
What are the types of non-price competition?
- Branding
- Advertising
- New product development
- New production methods
- Product/service quality and differentiation
- Mergers/takeovers
- Collusion
