Oligopoly

Question 1

Characteristics

Answer 1

-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%

Question 2

N firm conc ration

Answer 2

-Combined market share of top firms
-Higher ratio reduces competitiveness

Question 3

collusive behaviour

Answer 3

-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

Question 4

Non collusive behaviour

Answer 4

-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

Question 5

Overt collusion

Answer 5

-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

Question 6

Tacit collusion

Answer 6

-Firms behave in manner resembling collusions without any explicit agreement
-Follow observed pricing patterns set by competitors
-Engage in price leadership

Question 7

price leadership

Answer 7

-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

Question 8

Game theory

Answer 8

-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

Question 9

Price wars

Answer 9

-Firms cutting price below competitors
-Competitors lower theirs to match
-Attempt to gain market share
-Lose out on profits

Question 10

Predatory pricing

Answer 10

-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

Question 11

Limit pricing

Answer 11

-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

Question 12

Non-price competition

Answer 12

-Advertising and marketing - create brand loyalty and awareness - sunk costs
-Customer service - exceptional - advantage
-Differentiation - emphasize unique qualities through branding, quality, design, advertising