Oligopoly Flashcards
Characteristics
-High barriers to entry/exit - reduce competition
-High conc ratio - reduce competition
-Interdependence of firms - actions of one firm affects the actions of another
-Product differentiation - use branding
-5 firms with more than 50%
N firm conc ration
-Combined market share of top firms
-Higher ratio reduces competitiveness
collusive behaviour
-Firms agree to work together to minimise competition
-Maintain high prices, low consumer surplus, greater profits, limited competition
-Can maximise own benefits and restrict output to cause increase in market price
-Market stability - reduce uncertainty for firms and consumers
-Avoid price wars
-likely when there are only few firms that face similar costs, high barriers to entry as it is difficult to be caught, ineffective competition policy, consumer inertia
Non collusive behaviour
-Competition - compete aggressively to gain market share and increase individual profits
-Legal constaints - antitrust laws and regulations prohibit collusions and encourage independence
-Different objectives - make collusions difficult
-Common when market is saturated, one firm has significant cost advantage, products are homogeonous so firms must grow by taking market share from rivals
Overt collusion
-Firms openly agree to cooperate and set prices or output levels
-Ilegal
-Form of price fixing which maximises joint profits
-Cuts cost of competition or advertising
-Lead to formation of cartels which are explicit agreements among firms to coordinate their actions - opec
Tacit collusion
-Firms behave in manner resembling collusions without any explicit agreement
-Follow observed pricing patterns set by competitors
-Engage in price leadership
price leadership
-One firm changes their price and the other firms follow
-Usually the dominant firm - best knowledge of prevailing market conditions
-Other firms change their prices otherwise they risk losing market share
Game theory
-Interdependence
-predict outcome of decision by one firm when it has incomplete information about another
-unstable as incentive to cheat collusion - will lower revenue overall - LR
Price wars
-Firms cutting price below competitors
-Competitors lower theirs to match
-Attempt to gain market share
-Lose out on profits
Predatory pricing
-Illegal
-Low prices to drive out firms already in industry
-They make losses in SR
-Firms leave
-Remaining firms raise prices to slowly regain revenue
-Goods are prices below their AC
Limit pricing
-Low prices discourage entry of new firms
-Low profits - shareholders dissatisfied as they receive lower dividends
-Price below what a new firm would be able to sustain
-Potential firms cannot compete with existing firms
Non-price competition
-Advertising and marketing - create brand loyalty and awareness - sunk costs
-Customer service - exceptional - advantage
-Differentiation - emphasize unique qualities through branding, quality, design, advertising
