Oligopoly Flashcards
What are the characteristics of oligopoly
- Differentiated products
- high barriers to entry and exit
- interdependence of firms
- high concentration ratio
how to calculate n-firm ratio
add up their percentages
what does n firm ratio tell us
if the top 5 firms hold more than 60% of market share, it is an oligopoly
What are the reasons for collusion?
- Increase profit (by reducing competition or increase price)
- reduce uncertainty between firms
What are the reasons to not collude?
- It is illegal
- the risk of collusion (firms breakings cartel or price set where they don’t want it)
Define explicit collusion
when firms come to a formal agreement to collude
Define implicit collusion
when firms act in which suggests collusion but without a formal agreement
define cartel
a group of firms who formally agree to mutually set prices or restrict supply
why might cartels fall
- temptation to break out of cartel
define price leadership
Where a dominant firm sets the prices, where others follow.
PS:
They follow to:
1. Reduce price war
2. Limit consumers choice and competitive pricing
define barometric firm price leadership
Where no single firm is dominant, but one firm is still recognized by other firms as a benchmark of the market
game theory diagram
payoff = expected profit
types of price competition
- price wars
- predatory pricing
- limit pricing
define price war
when competing firms lower their prices in attempt to win market share or increase total revenue
define price limit
a price to drive away new competitors
define predatory pricing
when firms charge a price below AVC to force competitors out of market, then raise prices.
types of non price competition
- quality of service
- product performance
- branding
- provenance of product
