Oligopoly Flashcards
What is an oligopoly?
Where a few firms dominate an industry
Example of an oligopoly?
Apple and Sony for phones
How can you measure oligopoly?
Using CRx where x is the number of the largest firms. So CR4 would show the percentage of the market held by the largest 4 firms.
Are there barriers to entry with oligopoly?
In most cases of oligopoly, there are strong barriers to entry. But this is not always the case.
What is the key feature of an oligopoly?
As there are only a few firms, each needs to take careful notice of each other’s actions. This is called interdependence.
What does interdependence make appealing for oligopolies?
Merging so that they can avoid surprises and unexpected outcomes and act as a monopoly, to maximise industry profits.
Why do oligopolies not merge?
There is a tendency for firms to want to compete vigorously with each other in order to gain a bigger market share.
Do oligopolistic firms often change their prices?
No, their prices often remain unchanged.
What is a collusive oligopoly?
When firms in an oligopolistic market collude to charge the same prices for their products, in effect acting as a monopoly.
What are the two types of collusion?
Formal collusion and tacit collusion
What is formal collusion?
When firms openly agree on the price that they will all charge.
What is a formal collusive oligopoly called?
A cartel.
Why is a cartel illegal in some countries?
It often results in higher prices and less output for customers so is deemed by governments to be against consumer interest.
What is a tacit collusion?
When oligopolies charge the same price without any formal collusion.
So why is the price in oligopoly stable?
- Firms are afraid to raise prices above a certain level because other firms will not follow and so their customers will go to the other firms as substitutes.
- Firms are afraid to lower their prices below the current market price because other firms will follow, undercutting them, thus creating a price war which may harm all the firms involved.
- If MC rises it could still equal MR at the same point so nothing changes?
